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 0-14695
NTS-PROPERTIES VI,
A MARYLAND LIMITED PARTNERSHIP
Incorporated pursuant to the Laws of the State of Maryland
Internal Revenue Service - Employer Identification No. 61-1066060
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 | |||
| Consolidated Balance Sheets as of September 30, 2002 | ||||
| and December 31, 2001 | 3 | |||
| Consolidated Statement of Partners' Equity | ||||
| as of september 30, 2002 | 3 | |||
| Consolidated Statements of Operations for the Three Months | ||||
| and Nine Months Ended September 30, 2002 and 2001 | 4 | |||
| Consolidated Statements of Cash Flows for the Nine Months | ||||
| Ended September 30, 2002 and 2001 | 5 | |||
| Notes to Consolidated Financial Statements | 6-15 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 16-23 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 | ||
| 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 VI,
A MARYLAND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
As of As of
September 30, December 31,
2002 2001*
----------------- ------------------
(UNAUDITED)
ASSETS
- ------
Cash and equivalents $ 1,859,928 $ 60,167
Cash and equivalents - restricted 383,271 217,906
Accounts receivable, net of allowance for doubtful
accounts of $3,912 at September 30, 2002 and $2,390
at December 31, 2001 55,614 52,389
Land, buildings and amenities, net 42,920,993 44,986,348
Other assets 1,215,814 1,179,318
----------------- ------------------
TOTAL ASSETS $ 46,435,620 $ 46,496,128
================= ==================
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Mortgages and notes payable $ 34,040,834 $ 33,474,382
Accounts payable 673,460 932,295
Security deposits 230,943 223,533
Other liabilities 1,019,958 314,150
----------------- ------------------
TOTAL LIABILITIES 35,965,195 34,944,360
COMMITMENTS AND CONTINGENCIES (Note 10)
PARTNERS' EQUITY 10,470,425 11,551,768
----------------- ------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 46,435,620 $ 46,496,128
================= ==================
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Limited General
Partners Partner Total
------------------ ------------------ -----------------
PARTNERS' EQUITY/(DEFICIT)
- --------------------------
Capital contributions, net of offering costs $ 40,518,631 $ 100 $ 40,518,731
Net loss - prior years (14,096,238) (93,996) (14,190,234)
Net loss - current year (1,070,530) (10,813) (1,081,343)
Cash distributions declared to date (12,006,384) (121,277) (12,127,661)
Repurchase of limited partnership Interests (2,649,068) -- (2,649,068)
------------------ ------------------ -----------------
BALANCES AT SEPTEMBER 30, 2002 $ 10,696,411 $ (225,986) $ 10,470,425
================== ================== =================
* Reference is made to the audited consolidated financial statements in the Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 29, 2002.
The accompanying notes to consolidated financial statements are an integral part of these statements.
3
NTS PROPERTIES VI,
A MARYLAND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------- ------------- -------------
REVENUES
- --------
Rental income $ 2,670,267 $ 2,893,886 $ 7,867,600 $ 8,235,972
Interest and other income 9,274 5,232 19,547 26,287
Gain on sale of assets 260 -- 539 --
-------------- ------------- ------------- -------------
TOTAL REVENUES 2,679,801 2,899,118 7,887,686 8,262,259
-------------- ------------- ------------- -------------
EXPENSES
- --------
Operating expenses 826,180 808,427 2,177,642 2,331,489
Operating expenses - affiliated 395,624 421,267 1,204,999 1,184,714
Loss on disposal of assets 5,048 17,845 5,580 86,211
Interest expense 654,081 664,451 1,917,385 1,999,104
Management fees 136,465 148,398 404,750 423,034
Real estate taxes 229,815 261,470 698,750 746,259
Professional and administrative expenses 70,346 34,539 161,690 122,752
Professional and administrative expenses -
affiliated 87,575 105,940 269,411 271,720
Depreciation and amortization 699,524 702,441 2,103,794 2,004,079
-------------- ------------- ------------- -------------
TOTAL EXPENSES 3,104,658 3,164,778 8,944,001 9,169,362
-------------- ------------- ------------- -------------
Net loss before minority interest (424,857) (265,660) (1,056,315) (907,103)
Minority interest 9,043 10,214 25,028 33,006
-------------- ------------- ------------- -------------
Net loss $ (433,900)$ (275,874)$ (1,081,343) $ (940,109)
============== ============= ============= =============
Net loss allocated to the limited partners $ (429,561)$ (273,115)$ (1,070,530) $ (930,708)
============== ============= ============= =============
Net loss per limited partnership Interest $ (11.05) $ (7.00) $ (27.53) $ (23.87)
============== ============= ============= =============
Weighted average number of limited
partnership Interests 38,889 38,989 38,889 38,989
============== ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
NTS-PROPERTIES VI,
A MARYLAND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (1,081,343) $ (940,109)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts 12,284 5,153
Write-off of uncollectible accounts receivable (10,762) (836)
Loss on disposal of assets 5,580 86,211
Gain on sale of assets (539) --
Depreciation and amortization 2,144,797 2,057,838
Minority interest income 25,028 33,006
Changes in assets and liabilities:
Cash and equivalents - restricted (165,365) (196,436)
Accounts receivable (4,747) 10,035
Other assets (1,953) 50,839
Accounts payable (258,835) 141,676
Security deposits 7,410 (21,450)
Other liabilities 705,808 625,069
------------------ ------------------
Net cash provided by operating activities 1,377,363 1,850,996
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Additions to land, buildings and amenities (44,019) (265,500)
Proceeds from sale of assets 539 --
Joint Ventures, net (43,386) (59,971)
------------------ ------------------
Net cash used in investing activities (86,866) (325,471)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Principal payments on mortgages and notes payable (1,433,548) (1,315,302)
Proceeds from notes payable 2,000,000 101,493
Additions to loan costs (57,188) (4,850)
------------------ ------------------
Net cash provided by (used in) financing activities 509,264 (1,218,659)
------------------ ------------------
Net increase in cash and equivalents 1,799,761 306,866
CASH AND EQUIVALENTS, beginning of period 60,167 47,683
------------------ ------------------
CASH AND EQUIVALENTS, end of period $ 1,859,928 $ 354,549
================== ==================
Interest paid on a cash basis $ 1,893,359 $ 1,982,547
================== ==================
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
NTS-PROPERTIES VI,
A MARYLAND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements included herein should be read in conjunction with NTS-Properties VI's (the "Partnership") 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 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 consolidated 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 - Consolidation Policy and Joint Venture AccountingThe consolidated financial statements include the accounts of all wholly-owned properties and majority-owned joint ventures. Intercompany transactions and balances have been eliminated.
Other assets includes minority interest in our joint venture properties totaling approximately $689,000 and $670,000 as of September 30, 2002 and December 31, 2001, respectively. These amounts have been derived primarily from distributions of the joint ventures in excess of the respective minority partner's historical investment in the joint ventures used for financial reporting purposes. This amount will be realized upon the sale of the respective joint venture property or dissolution of the respective joint venture. The underlying assets of the joint ventures are assessed for asset impairment on a periodic basis.
Note 2 - Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity 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 RiskWe own and operate, either wholly or through a joint venture, apartment communities in Kentucky (Lexington), Indiana (Indianapolis) and Florida (Orlando). We also own and operate, through a joint venture, a commercial rental property in Kentucky (Louisville). Substantially all of the commercial property's tenants are local businesses or are businesses which have operations in the Louisville area.
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.
6
Cash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less. In September 2002, we invested $200,000 in two money market accounts ($100,000 in each account). We also 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 in a repurchase agreement for U.S. government or agency securities on a nightly basis. As of September 30, 2002, approximately $994,000 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 which have been escrowed with mortgage companies for property taxes in accordance with the loan agreements.
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, 5-30 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 $76,335,000.
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 any impairment loss.
Note 7 - 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 $380 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 2, 2002.
On July 24, 2002, ORIG amended its tender offer to extend the expiration date from August 2, 2002, to September 3, 2002.
ORIG's tender offer expired September 3, 2002. A total of 2,650 Interests were tendered. ORIG accepted all Interests tendered at a purchase price of $380 per Interest for a total of $972,800. We did not participate in this tender offer.
7
Detailed information on ORIG's tender offer, including the amendment 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.
Note 8 - Mortgages and Notes PayableMortgages and notes payable consist of the following:
September 30, December 31,
2002 2001
------------------ -------------------
Mortgage payable with an insurance company,
bearing interest at 7.74%, due October 15, 2012,
secured by certain land, buildings and amenities. $ 11,452,476 $ 11,700,216
Mortgage payable with an insurance company,
bearing interest at 7.57%, due May 15, 2009,
secured by certain land, buildings and amenities. 7,103,240 7,691,673
Mortgage payable with an insurance company,
bearing interest at 7.32%, due October 15, 2012,
secured by certain land, buildings and amenities. 6,655,296 6,980,987
Mortgage payable with an insurance company,
bearing interest at 8.375%, due December 1, 2010,
secured by certain land, buildings and amenities. 3,083,183 3,135,343
Mortgage payable with an insurance company,
bearing interest at 7.38%, due December 5, 2012,
secured by certain land, buildings and amenities. 2,234,562 2,341,123
Mortgage payable with an insurance company,
bearing interest at 7.38%, due December 5, 2012,
secured by certain land, buildings and amenities. 1,489,708 1,560,749
Mortgage payable with an insurance company,
bearing interest at 6.93%, due December 5, 2012,
secured by certain land, building, and amenities. 1,997,504 --
Note payable to a bank, bearing interest at the Prime
Rate, but not less than 6.0%, due March 27, 2003. At
September 30, 2002, the interest rate was 6.00%. 12,751 32,958
Note payable to a bank, bearing interest at the Prime
Rate, but not less than 6.0%, due March 31, 2003. At
September 30, 2002, the interest rate was 6.00%. 12,114 31,333
------------------ -------------------
$ 34,040,834 $ 33,474,382
================== ===================
8
As of September 30, 2002, the fair value of long-term debt is approximately $36,671,000, based on the borrowing rates currently available to us for mortgages with similar terms and average maturities. On August 2, 2002, we obtained additional financing in the amount of $2,000,000 secured by certain land, building, and amenities of Sabal Park Apartments. The interest rate is 6.93% and the maturity date is December 5, 2012. The proceeds of this loan will be used for capital additions and repairs.
Note 9 - 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 fee is equal to 5% of the gross revenues from residential properties and 6% of the gross revenues from the commercial property. 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 and major repair and renovation projects. 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.
Nine Months Ended
September 30,
--------------------------------------
2002 2001
------------------ ------------------
Property management fees $ 404,750 $ 423,034
------------------ ------------------
Property management 771,247 790,814
Leasing 148,513 143,941
Administrative - operating 248,257 212,940
Other 36,982 37,019
------------------ ------------------
Total operating expenses - affiliated 1,204,999 1,184,714
------------------ ------------------
Professional and administrative expenses - affiliated 269,411 271,720
------------------ ------------------
Repairs and maintenance fee 1,168 30,729
Leasing commissions 3,197 --
Construction management -- 2,174
------------------ ------------------
Total related party transactions capitalized 4,365 32,903
------------------ ------------------
Total related party transactions $ 1,883,525 $ 1,912,371
================== ==================
During the nine months ended September 30, 2002 and 2001, we were charged $22,190 and $16,812, respectively, for property maintenance fees from an affiliate of NTS Development Company.
9
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 on 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 $48,000, which was expensed.
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 March 29, 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 12 - Subsequent Event).
We have been sued by Elder Construction & Associates, Inc. in Jefferson Circuit Court, Louisville, Kentucky, in a lawsuit styled Elder Construction & Associates, Inc. v. NTS Development Company, Frontier Insurance Company, NTS-Properties VI, a Maryland Limited Partnership, NTS-Properties Associates VI and NTS Capital Corporation.
Elder Construction was hired to be the framing subcontractor with respect to certain improvements at Phase III of Park Place Apartments in Lexington, Kentucky. After being removed from the job for its failure to provide its services in a professional, diligent and workmanlike manner, a Complaint was filed on behalf of Elder Construction in November 1999, alleging, inter alia, breach of contract. The Complaint requested judgment against all Defendants in the amount of $233,122 plus interest and other relief against the Defendants.
10
We, and the other Defendants, answered the Complaint and asserted counterclaims against the Plaintiff for, inter alia, breach of contract. The principals of the NTS Defendants have indicated that the suit brought by Elder Construction is without merit and will be vigorously defended, including the prosecution by the Defendants of counterclaims against Elder Construction. The case had been set for trial in June 2002, but was removed from the trial docket by the parties, who have agreed to binding arbitration to settle this lawsuit. The binding arbitration should begin in late 2002 and conclude shortly thereafter. We believe that the resolution of these legal proceedings, through binding arbitration, will not have a material effect on our consolidated position or results of operations.
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 consolidated financial position or results of operations except as discussed herein.
We plan to replace the roofs at both Willow Lake Apartments (26 buildings) and Park Place Apartments Phase I (23 buildings), all of which were installed using shingles produced by a single manufacturer. The shingles appear to contain defects which may cause the roofs to fail. As the shingle manufacturer has declared bankruptcy, we do not expect to be able to recover any of the costs of the roof replacements in the event of any such failures. Based upon these facts, management changed the estimated useful life of the roof assets. The change resulted in an approximate increase of $149,000 and $49,000 in depreciation expense for the nine months ended September 30, 2002, and 2001, respectively. We do not have sufficient working capital to make all of the roof replacements at one time. As of September 30, 2002, five buildings at Willow Lake Apartments have had roofs replaced. The total cost of replacing all the remaining roofs is estimated to be $880,000 ($20,000 per building).
Note 11 - Segment ReportingOur reportable operating segments include Residential and Commercial Real Estate Operations. The residential operations represent our ownership and operating results relative to apartment communities known as Willow Lake, Park Place Phase I, Park Place Phase III, Sabal Park and Golf Brook. The commercial operations represent our ownership and operating results relative to suburban commercial office space known as Plainview Point III Office Center.
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 disaggregates financial information for the purposes of assisting in making internal operating decisions. We evaluate performance based on stand-alone operating segment net income.
11
Three Months Ended September, 2002
---------------------------------------------------------
Residential Commercial Total
----------------- ------------------ ------------------
Rental income $ 2,530,491 $ 139,776 $ 2,670,267
Interest and other income 6,345 225 6,570
Gain on sale of assets 260 -- 260
----------------- ------------------ ------------------
Total net revenues $ 2,537,096 $ 140,001 $ 2,677,097
================= ================== ==================
Operating expenses and operating expenses -
affiliated $ 1,144,235 $ 77,569 $ 1,221,804
Loss on disposal of assets 5,048 -- 5,048
Interest expense 219,337 -- 219,337
Management fees 127,675 8,790 136,465
Real estate taxes 221,019 8,796 229,815
Depreciation and amortization 630,930 46,227 677,157
----------------- ------------------ ------------------
Total expenses $ 2,348,244 $ 141,382 $ 2,489,626
================= ================== ==================
Net income (loss) $ 188,852 $ (1,381)$ 187,471
================= ================== ==================
Three Months Ended September 30, 2001
---------------------------------------------------------
Residential Commercial Total
----------------- ------------------ ------------------
Rental income $ 2,675,368 $ 218,518 $ 2,893,886
Interest and other income 2,511 660 3,171
----------------- ------------------ ------------------
Total net revenues $ 2,677,879 $ 219,178 $ 2,897,057
================= ================== ==================
Operating expenses and operating expenses -
affiliated $ 1,127,151 $ 102,543 $ 1,229,694
Loss on disposal of assets 17,845 -- 17,845
Interest expense 207,295 -- 207,295
Management fees 134,930 13,468 148,398
Real estate taxes 252,947 8,523 261,470
Depreciation and amortization 631,520 48,554 680,074
----------------- ------------------ ------------------
Total expenses $ 2,371,688 $ 173,088 $ 2,544,776
================= ================== ==================
Net income $ 306,191 $ 46,090 $ 352,281
================= ================== ==================
12
Nine Months Ended September, 2002
---------------------------------------------------------
Residential Commercial Total
----------------- ------------------ ------------------
Rental income $ 7,448,202 $ 419,398 $ 7,867,600
Interest and other income 12,669 2,845 15,514
Gain on sale of assets 539 -- 539
----------------- ------------------ ------------------
Total net revenues $ 7,461,410 $ 422,243 $ 7,883,653
================= ================== ==================
Operating expenses and operating expenses -
affiliated $ 3,144,768 $ 237,873 $ 3,382,641
Loss on disposal of assets 5,580 -- 5,580
Interest expense 612,065 -- 612,065
Management fees 379,461 25,289 404,750
Real estate taxes 672,362 26,388 698,750
Depreciation and amortization 1,896,946 139,748 2,036,694
----------------- ------------------ ------------------
Total expenses $ 6,711,182 $ 429,298 $ 7,140,480
================= ================== ==================
Net income (loss) $ 750,228 $ (7,055)$ 743,173
================= ================== ==================
Nine Months Ended September 30, 2001
---------------------------------------------------------
Residential Commercial Total
----------------- ------------------ ------------------
Rental income $ 7,549,718 $ 686,254 $ 8,235,972
Interest and other income 15,698 1,836 17,534
----------------- ------------------ ------------------
Total net revenues $ 7,565,416 $ 688,090 $ 8,253,506
================= ================== ==================
Operating expenses and operating expenses -
affiliated $ 3,215,690 $ 300,513 $ 3,516,203
Loss on disposal of assets 86,211 -- 86,211
Interest expense 623,579 -- 623,579
Management fees 380,630 42,404 423,034
Real estate taxes 720,690 25,569 746,259
Depreciation and amortization 1,790,479 146,501 1,936,980
----------------- ------------------ ------------------
Total expenses $ 6,817,279 $ 514,987 $ 7,332,266
================= ================== ==================
Net income $ 748,137 $ 173,103 $ 921,240
================= ================== ==================
13
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated 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 $ 2,677,097 $ 2,897,057
Other income for Partnership 2,704 2,061
------------------ -----------------
Total consolidated net revenues $ 2,679,801 $ 2,899,118
================== =================
INTEREST EXPENSE
- ----------------
Interest expense for reportable segments $ 219,337 $ 207,295
Interest expense for Partnership 434,744 457,156
------------------ -----------------
Total interest expense $ 654,081 $ 664,451
================== =================
DEPRECIATION AND AMORTIZATION
- -----------------------------
Total depreciation and amortization for
reportable segments $ 677,157 $ 680,074
Depreciation and amortization for Partnership 22,367 22,367
------------------ -----------------
Total depreciation and amortization $ 699,524 $ 702,441
================== =================
NET INCOME (LOSS)
- -----------------
Total net income for reportable segments $ 187,471 $ 352,281
Less minority interest for Partnership 9,043 10,214
Plus net loss for Partnership (612,328) (617,941)
------------------ -----------------
Total net loss $ (433,900) $ (275,874)
================== =================
14
Nine Months Ended September 30,
---------------------------------------
2002 2001
------------------ -----------------
NET REVENUES
- ------------
Total revenues for reportable segments $ 7,883,653 $ 8,253,506
Other income for Partnership 4,033 8,753
------------------ -----------------
Total consolidated net revenues $ 7,887,686 $ 8,262,259
================== =================
INTEREST EXPENSE
Interest expense for reportable segments $ 612,065 $ 623,579
Interest expense for Partnership 1,305,320 1,375,525
------------------ -----------------
Total interest expense $ 1,917,385 $ 1,999,104
================== =================
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for
reportable segments $ 2,036,694 $ 1,936,980
Depreciation and amortization for Partnership 67,100 67,099
------------------ -----------------
Total depreciation and amortization $ 2,103,794 $ 2,004,079
================== =================
NET INCOME (LOSS)
Total net income for reportable segments $ 743,173 $ 921,240
Less minority interest for Partnership 25,028 33,006
Plus net loss for Partnership (1,799,488) (1,828,343)
------------------ -----------------
Total net loss $ (1,081,343) $ (940,109)
================== =================
Note 12 - 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 overruling the demurrer of our General Partner, the general partner of a limited partnership affiliated with us, and two other entities and one individual affiliated with us. On the same date the court sustained the demurrer of the general partners of three limited partnerships affiliated with us. These three limited partners are no longer parties to the lawsuit. The individuals and entities whose demurrer was overruled, including our General Partner, remain parties to the lawsuit and intend to continue to vigorously defend it. 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 March 29, 2002. For information on another development in this lawsuit, see Part II, Item 1 of this Quarterly Report on Form 10-Q (see Note 10 - Commitments and Contingencies).
15
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Consolidated 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 to be "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 MD&A, 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:
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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
- -----------------------
Sabal Park Apartments (2) 93% 94%
Park Place Apartments Phase I 85% 82%
Willow Lake Apartments (2) 87% 97%
Park Place Apartments Phase III 93% 78%
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
Golf Brook Apartments (96.03%) 94% 93%
Plainview Point III Office Center (95.04%) (3) 56% 81%
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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
- -----------------------
Sabal Park Apartments (1) 93% 94% 91% 95%
Park Place Apartments Phase I 81% 83% 76% 79%
Willow Lake Apartments (1) 87% 98% 89% 96%
Park Place Apartments Phase III 86% 76% 78% 65%
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
Golf Brook Apartments (96.03%) 97% 93% 91% 89%
Plainview Point III Office Center (95.04%) (2) 56% 92% 55% 96%
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
- -----------------------
Sabal Park Apartments $ 477,564 $ 483,849 $ 1,416,933 $ 1,470,264
Park Place Apartments Phase I $ 377,403 $ 409,893 $ 1,078,554 $ 1,138,371
Willow Lake Apartments $ 602,864 $ 676,300 $ 1,828,080 $ 1,925,359
Park Place Apartments Phase III $ 332,946 $ 329,616 $ 935,895 $ 829,535
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
Golf Brook Apartments (96.03%) $ 746,319 $ 778,221 $ 2,201,948 $ 2,201,886
Plainview Point III Office Center (95.04%) $ 140,001 $ 219,178 $ 422,243 $ 688,090
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If 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.
Rental IncomeRental income decreased approximately $224,000, or 8%, and $368,000, or 5%, for the three months and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001. The decrease is primarily a result of decreased average occupancy at Plainview Point III Office Center, Willow Lake Apartments, Park Place Apartments Phase I and Sabal Park Apartments. The decrease is partially offset by increased average occupancy at Park Place Apartments Phase III.
Period-ending occupancy percentages represent occupancy only on a specific date; therefore, the above analysis considers average occupancy percentages, which are more representative of the entire period's results.
Operating ExpensesOperating expenses decreased approximately $154,000, or 7%, for the nine months ended September 30, 2002, as compared to the same period in 2001. The decrease is primarily the result of 1) decreased utilities at Plainview Point III Office Center, Park Place Apartments Phase I and III, Willow Lake Apartments and Golf Brook Apartments, 2) decreased repairs and maintenance expenses at Plainview Point III Office Center, Willow Lake Apartments, Golf Brook Apartments and Sabal Park Apartments, 3) decreased landscaping expenses at Plainview Point III Office Center and Willow Lake Apartments, 4) decreased legal and professional fees at Park Place Apartments Phase III and 5) decreased administrative expenses at Golf Brook Apartments. The decrease is partially offset by 1) increased insurance expense at all the underlying properties, 2) increased cleaning expenses at Park Place Apartments Phase I and III, Willow Lake Apartments, and Sabal Park Apartments, 3) increased landscaping expenses at Golf Brook Apartments and Sabal Park Apartments and 4) increased administrative expenses at Willow Lake Apartments.
Loss on Disposal of AssetsThe loss on disposal of assets for the three months ended September 30, 2001, was attributable to the exterior paint project, landscaping renovations and wood replacements at Willow Lake Apartments.
The loss on disposal of assets for the nine months ended September 30, 2001, was attributable to the exterior paint project at Park Place Apartments Phase I and Willow Lake Apartments and the wood replacement project and landscaping renovations at Willow Lake Apartments.
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Real Estate taxes decreased approximately $32,000, or 12%, and $48,000, or 6%, for the three months and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001. The decrease is primarily due to the decreased tax assessment for Park Place Apartments Phase III.
Professional and Administrative ExpensesProfessional and administrative expenses increased approximately $36,000, and $39,000, or 32%, for the three months and nine months ended September 30, 2002, respectively, compared to the same periods in 2001. The increase is primarily due to increased litigation costs as a result of the lawsuit filed against our General Partner.
Professional and Administrative Expenses - AffiliatedProfessional and administrative expenses - affiliated decreased approximately $18,000, or 17%, for the three months ended September 30, 2002, as compared to the same period in 2001. The decrease is primarily the result of decreased personnel costs for property management accounting and asset management. Professional and administrative expense - affiliated are expenses incurred for services performed by employees of NTS Development Company, an affiliate of the General Partner.
Depreciation ExpenseDepreciation expense increased approximately $100,000, or 5%, for the nine months ended September 30, 2002, as compared to the same period in 2001, primarily as a result of management's change in the estimated useful life of all the roof assets at Park Place Apartments Phase I and Willow Lake Apartments in July 2001. The estimated useful life was reduced in anticipation of replacing the roofs. The increase is also due to building improvements, golf cart purchases, landscaping renovations, and water-sub-metering installation (net of retirements), at Park Place Apartments Phase I and Willow Lake Apartments, and new pool furniture at Sabal Park Apartments.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 5-30 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 $76,335,000.
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Cash flows provided by (used in):
Nine Months Ended
September 30,
---------------------------------------------
2002 2001
------------------ -------------------
Operating activities $ 1,377,363 $ 1,850,996
Investing activities (86,866) (325,471)
Financing activities 509,264 (1,218,659)
------------------ -------------------
Net increase in cash and equivalents $ 1,799,761 $ 306,866
================== ===================
Net cash provided by operating activities decreased approximately $474,000, or 26%, for the nine months ended September 30, 2002, as compared to the same period in 2001. The decrease was primarily driven by the change in payables and increased net loss.
The decrease of approximately $239,000, or 73%, in net cash used in investing activities during the nine months ended September 30, 2002, as compared to the same period in 2001, was primarily due to decreased capital expenditures.
The increase of approximately $1,728,000, in net cash provided by financing activities, during the nine months ended September 30, 2002, as compared to the same period in 2001, was primarily due to an increase in proceeds from mortgage loans on Sabal Park Apartments.
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 on a GAAP basis has been omitted.
The demand on future liquidity is anticipated to increase as a result of the replacement of roofs at both Willow Lake Apartments (26 buildings) and Park Place Apartments Phase I (23 buildings) all of which were installed using shingles produced by a single manufacturer. The shingles appear to contain defects which may cause the roofs to fail. As the shingle manufacturer has declared bankruptcy, we do not expect to be able to recover any of the costs of the roof replacements in the event of any such failures. Based upon these facts, management changed the estimated useful life of the roof assets. The change resulted in an approximate increase in depreciation expense of $149,000 and $49,000 for the nine months ended September 30, 2002, and 2001, respectively. As of September 30, 2002, five buildings at Willow Lake Apartments have had roofs replaced. The total cost of replacing the remaining roofs is estimated to be $880,000 ($20,000 per building). Roof replacements will be made as each roof fails and as working capital permits.
The demand on future liquidity is also 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 at the end of its lease term, which was November 30, 2001. This left Plainview Point III Office Center with only 54% occupancy. As a result of this vacancy, there
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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 expenditures.
In an effort to continue to improve occupancy at our apartment communities, we have an on-site leasing staff, who are employees of NTS Development Company, at each of the apartment communities. The staff handles 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.
The leasing and renewal negotiations for our commercial property are handled 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 property. All advertising for the commercial property is coordinated by NTS Development Company's marketing staff located in Louisville, Kentucky.
Leases at Plainview Point III Office Center 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 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.
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Our 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 two notes payable of $12,751 and $12,114, that bear interest at the Prime Rate. A hypothetical 100 basis point increase in interest rates would not significantly increase annual interest expense on the variable rate notes. A hypothetical 100 basis point increase in interest rates would result in an approximate $1,734,000 decrease in the fair value of debt.
Item 4 - Controls and ProceduresThe 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 March 29, 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 overruling the demurrer of our General Partner, the general partner of a limited partnership affiliated with us, and two other entities and one individual affiliated with us. On the same date the court sustained the demurrer of the general partners of three limited partnerships affiliated with us. These three limited partners are no longer parties to the lawsuit. The individuals and entities whose demurrer was overruled, including our General Partner, remain parties to the lawsuit and intend to continue to vigorously defend it. 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 March 29, 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 VI, | |||
|---|---|---|---|
| A MARYLAND LIMITED PARTNERSHIP | |||
| By: | NTS-Properties Associates VI, | ||
| 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 VI, General Partner of NTS-Properties VI, a Maryland Limited Partnership
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 VI, General Partner of NTS-Properties VI, a Maryland Limited Partnership
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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