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 June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17589
NTS-PROPERTIES VII, LTD.
Incorporated pursuant to the Laws of the State of Florida
Internal Revenue Service - Employer Identification No. 61-1119232
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 June 30, 2002 and December 31, 2001 | 3 | |||
| Statement of Partners' Equity as of June 30, 2002 | 3 | |||
| Statements of Operations for the Three Months and | ||||
| Six Months Ended June 30, 2002 and 2001 | 4 | |||
| Statements of Cash Flows for the Six Months Ended | ||||
| June 30, 2002 and 2001 | 5 | |||
| Notes to Financial Statements | 6-10 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 11-17 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 | ||
PART II
| Item 1. | Legal Proceedings | 18 | ||
| Item 2. | Changes in Securities | 18 | ||
| Item 3. | Defaults Upon Senior Securities | 18 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 18 | ||
| Item 5. | Other Information | 18 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 18 | ||
| Signatures | 19 |
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
NTS-PROPERTIES VII, LTD.
BALANCE SHEETS
As of As of
June 30, December 31,
2002 2001*
----------------- ------------------
(UNAUDITED)
ASSETS
- ------
Cash and equivalents $ 437,504 $ 431,232
Cash and equivalents - restricted 27,250 23,568
Accounts receivable 6,156 1,173
Land, buildings and amenities, net 7,528,887 7,730,705
Investment in and advances to joint venture 619,480 572,171
Other assets 57,984 62,034
----------------- ------------------
TOTAL ASSETS $ 8,677,261 $ 8,820,883
================= ==================
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Mortgage and notes payable $ 3,578,113 $ 3,659,778
Accounts payable 54,110 97,604
Security deposits 27,250 23,375
Other liabilities 74,704 8,686
----------------- ------------------
TOTAL LIABILITIES 3,734,177 3,789,443
COMMITMENTS AND CONTINGENCIES (Note 11)
PARTNERS' EQUITY 4,943,084 5,031,440
----------------- ------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 8,677,261 $ 8,820,883
================= ==================
STATEMENT OF PARTNERS' EQUITY (UNAUDITED)
Limited General
Partners Partner Total
----------------- ------------------ ------------------
PARTNERS' EQUITY/(DEFICIT)
- --------------------------
Capital contributions, net of offering costs $ 10,935,700 $ 100 $ 10,935,800
Net loss - prior years (2,696,552) (27,237) (2,723,789)
Net loss - current year (87,472) (884) (88,356)
Cash distributions declared to date (2,717,046) (27,445) (2,744,491)
Repurchase of limited partnership Interests (436,080) -- (436,080)
----------------- ---------------- ----------------
BALANCES AT JUNE 30, 2002 $ 4,998,550 $ (55,466) $ 4,943,084
================= ================ ================
* Reference is made to the audited financial statements in Form 10-K as filed with the Securities and Exchange
Commission on March 29, 2002.
The accompanying notes to financial statements are an integral part of these statements.
3
NTS-PROPERTIES VII, LTD.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES
- --------
Rental income $ 365,575 $ 382,108 $ 723,137 $ 761,474
Interest and other income 2,544 6,641 3,988 11,151
Income from investment in joint venture 25,602 18,115 47,309 36,409
Gain on sale of assets 293 -- 293 --
------------- ------------- ------------- -------------
TOTAL REVENUES 394,014 406,864 774,727 809,034
------------- ------------- ------------- -------------
EXPENSES
- --------
Operating expenses 97,231 110,286 181,474 203,879
Operating expenses - affiliated 61,864 68,781 120,747 127,621
Loss on disposal of assets 450 6,106 450 49,791
Interest expense 67,559 69,803 134,405 137,847
Management fees 19,302 19,466 37,448 39,293
Real estate taxes 22,239 22,452 42,891 44,904
Professional and administrative expenses 18,825 22,337 38,483 42,001
Professional and administrative expenses -
affiliated 28,444 26,066 57,107 50,351
Depreciation and amortization 125,159 100,560 250,078 198,487
------------- ------------- ------------- -------------
TOTAL EXPENSES 441,073 445,857 863,083 894,174
------------- ------------- ------------- -------------
Net loss $ (47,059)$ (38,993) $ (88,356) $ (85,140)
============= ============= ============= =============
Net loss allocated to the limited partners $ (46,588)$ (38,603) $ (87,472) $ (84,289)
============= ============= ============= =============
Net loss per limited partnership Interest $ (0.08)$ (0.07) $ (0.16) $ (0.15)
============= ============= ============= =============
Weighted average number of limited
partnership Interests 552,236 553,236 552,236 553,236
============= ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements.
4
NTS-PROPERTIES VII, LTD.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------------------
2002 2001
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (88,356) $ (85,140)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Loss on disposal of assets 450 49,791
Gain on sale of assets (293) --
Depreciation and amortization 251,640 200,048
Income from investment in joint venture (47,309) (36,409)
Changes in assets and liabilities:
Cash and equivalents - restricted (3,682) (6,800)
Accounts receivable (4,983) 49,147
Other assets 2,489 14,745
Accounts payable (43,494) 19,300
Security deposits 3,875 1,950
Other liabilities 66,018 46,995
----------------- ------------------
Net cash provided by operating activities 136,355 253,627
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Proceeds from sale of assets 293 --
Additions to land, buildings and amenities (48,711) (77,534)
Investment in and advances to joint venture -- (53,943)
----------------- ------------------
Net cash used in investing activities (48,418) (131,477)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from mortgage loan and notes payable -- 51,060
Principal payments on mortgage and notes payable (81,665) (69,812)
----------------- ------------------
Net cash used in financing activities (81,665) (18,752)
Net increase in cash and equivalents 6,272 103,398
CASH AND EQUIVALENTS, beginning of period 431,232 307,173
----------------- ------------------
CASH AND EQUIVALENTS, end of period $ 437,504 $ 410,571
================= ==================
Interest paid on a cash basis $ 133,080 $ 137,961
================= ==================
The accompanying notes to financial statements are an integral part of these statements.
5
NTS-PROPERTIES VII, LTD.
NOTES TO FINANCIAL STATEMENTS
The unaudited financial statements included herein should be read in conjunction with NTS- Properties VII, Ltd's (the "Partnership") 2001 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 financial statements for the three months and six months ended June 30, 2002 and 2001.
Note 1 - Consolidation Policy and Joint Venture AccountingThe financial statements include the accounts of all wholly-owned properties. Intercompany transactions and balances have been eliminated. The less than 50% owned joint venture is accounted for under the equity method. As used in this 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 venture.
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 RiskWe own and operate, through a joint venture, a commercial rental property in Louisville, Kentucky. The sole tenant which occupies 100% of the property is a business which has operations in the Louisville area. We also own and operate apartment communities in Louisville and Lexington, Kentucky.
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 in a repurchase agreement for U.S. government or agency securities on a nightly basis. As of June 30, 2002, approximately $323,000 of said investment was included in cash and cash equivalents.
6
Cash and equivalents - restricted represents funds received for residential security deposits and funds reserved by us for the repurchase of limited partnership Interests.
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 7-30 years for land improvements, 5-30 years for buildings and improvements and 5-30 years for amenities. The aggregate cost of our properties for federal tax purposes is approximately $12,750,000.
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 June 30, 2002, did not result in an impairment loss.
Note 7 - Investment in Joint VentureBlankenbaker Business Center Joint Venture (the "Joint Venture') was organized on December 28, 1990, by us and NTS-Properties Plus Ltd. to own and operate Blankenbaker Business Center 1A and to acquire an approximately 2.49 acre parking lot that was being leased by the business center from an affiliate of our General Partner. On August 16, 1994, the Blankenbaker Business Center Joint Venture agreement was amended to admit NTS-Properties IV to the Joint Venture.
For the three months ended June 30, 2002 and 2001, Blankenbaker Business Center 1A had total revenues of $237,347 and $232,199, respectively, and net income of $81,689 and $65,396, respectively.
For the six months ended June 30, 2002 and 2001, Blankenbaker Business Center 1A had total revenues of $477,444 and $470,695, respectively, and net income of $150,953 and $131,350, respectively.
Note 8 - Tender OfferOn May 10, 2002, ORIG, LLC, ("ORIG") an affiliate of ours, filed a tender offer with the Securities and Exchange Commission, to purchase up to 20,000 of the limited partnership Interests at a price of $6.00 per Interest as of the date of the tender offer. Approximately $130,000 ($120,000 to purchase 20,000 Interests plus approximately $10,000 for expenses associated with the tender offer)
7
is required to purchase all 20,000 Interests. If more than 20,000 Interests are tendered, ORIG may choose to acquire the additional Interests on a pro rata basis. Interests acquired by ORIG will be held by it. The tender offer will expire on August 16, 2002 unless extended. We are not participating in this tender offer.
Note 9 - Mortgage and Notes PayableMortgage and notes payable consist of the following:
June 30, December 31,
2002 2001
------------------ -------------------
Mortgage payable to an insurance company,
bearing interest at a fixed rate of 7.37%, due
October 15, 2012, secured by land and buildings. $ 3,558,888 $ 3,627,428
Note payable to a bank, bearing interest at the
Prime Rate, but not less than 6.00%, due March
27, 2003. At June 30, 2002, the interest rate was
6.00%. 14,363 24,169
Note payable to a bank, bearing interest at the
Prime Rate, but not less than 6.00%, due March
27, 2003. At June 30, 2002, the interest rate was
6.00%. 4,862 8,181
------------------ -------------------
$ 3,578,113 $ 3,659,778
================== ===================
As of June 30, 2002, the fair value of long-term debt is approximately $3,706,000, based on the borrowing rates currently available to us for mortgages 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 properties. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of the 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 six months ended June 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.
8
Six Months Ended
June 30,
---------------------------------------
2002 2001
----------------- ------------------
Property management fees $ 37,448 $ 39,293
----------------- ------------------
Property management 71,046 77,753
Leasing 11,797 14,712
Administrative - operating 37,230 34,462
Other 674 694
----------------- ------------------
Total operating expenses - affiliated 120,747 127,621
----------------- ------------------
Professional and administrative expenses - affiliated 57,107 50,351
----------------- ------------------
Repairs and maintenance fee 2,235 1,436
Construction management 1,547 --
----------------- ------------------
Total related party transactions capitalized 3,782 1,436
----------------- ------------------
Total related party transactions $ 219,084 $ 218,701
================= ==================
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 June 30, 2002. Under an indemnification agreement with our General Partner, we are responsible for the costs of the defense of this action. During the six months ended June 30, 2002, our share of these legal costs was approximately $12,000, which was expensed.
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
9
except as discussed herein. However, due to the event on September 11, 2001, affecting the insurance industry, we are unable to determine at what price we will be able to renew our insurance coverage when the current policies expire in September 2002, or if the coverage available will be adequate.
We plan to replace the roofs at Park Place Apartments Phase II (18 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 $48,000 increase in depreciation expense for the six months ended June 30, 2002. We do not have sufficient working capital to make all the roof replacements at one time. As of June 30, 2002, one roof replacement has been completed. The total cost of replacing the remaining roofs is estimated to be $340,000 ($20,000 per building).
Note 12 - Segment ReportingOur reportable operating segments include only one segment - Residential Real Estate Operations.
Note 13 - Subsequent EventOn August 7, 2002, ORIG, LLC, ("ORIG") an affiliate of ours, filed an amendment to the May 10, 2002 tender offer filing. The amendment extended the tender offer expiration date from August 16, 2002 to September 16, 2002.
10
This 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 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:
11
The occupancy levels at our properties and joint venture as of June 30, 2002 and 2001 were as follows:
Six Months Ended June 30,
----------------------------------------
2002 2001
----------------- -----------------
Wholly-Owned Properties
- -----------------------
The Park at the Willows (1) 79% 96%
Park Place Apartments Phase II (2) 78% 81%
Property Owned in Joint Venture with NTS-
- -----------------------------------------
Properties IV and NTS-Properties Plus Ltd.
- ------------------------------------------
(Ownership % at June 30, 2002)
- ------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100%
12
The average occupancy levels at our properties and joint venture during the three months and six months ended June 30, 2002 and 2001 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Wholly-Owned Properties
- -----------------------
The Park at the Willows (1) 80% 94% 76% 94%
Park Place Apartments Phase II (2) 77% 79% 77% 77%
Property Owned in Joint Venture with NTS-
- -----------------------------------------
Properties IV and NTS-Properties Plus Ltd.
- ------------------------------------------
(Ownership % at June 30, 2002)
- ------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100% 100% 100%
Rental and other income generated by our properties and joint venture for the three months and six months ended June 30, 2002 and 2001were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Wholly-Owned Properties
- -----------------------
The Park at the Willows $ 80,027 $ 92,731 $ 150,657 $ 183,237
Park Place Apartments Phase II $ 287,157 $ 292,186 $ 574,381 $ 582,366
Property Owned in Joint Venture with NTS-
- -----------------------------------------
Properties IV and NTS-Properties Plus Ltd.
- ------------------------------------------
(Ownership % at June 30, 2002)
- ------------------------------
Blankenbaker Business Center 1A (31.34%) $ 237,347 $ 232,199 $ 477,444 $ 470,695
Current occupancy levels are considered adequate to continue the operation of our properties without the need of additional financing. See the Consolidated Cash Flows and Financial Condition section of Item 2 for a discussion regarding the cash requirements of our current debt financings.
13
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 VII continues to hold a 31.34% interest in the Blankenbaker Business Center 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.
Results of OperationsIf there has not been a material change in an item from June 30, 2001 to June 30, 2002, we have omitted any discussion concerning that item.
Rental IncomeRental income decreased approximately $38,000, or 5%, for the six months ended June 30, 2002, as compared to the same period in 2001. The decrease is primarily a result of decreased average occupancy at The Park at the Willows.
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.
Income From Investment in Joint VentureIncome from joint venture increased approximately $11,000, or 30%, for the six months ended June 30, 2002, as compared to the same period in 2001. The increase is the result of increased net income at Blankenbaker Business Center 1A.
Operating ExpensesOperating expenses decreased approximately $13,000, or 12%, and $22,000, or 11%, for the three months and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. The decrease is primarily a result of decreased repairs and maintenance costs (mainly parking lot repairs and floor covering) and decreased advertising costs at Park Place Apartments Phase II and The Park at the Willows. The decrease is also due to decreased utilities at Park Place Apartments Phase II.
Loss on Disposal of AssetsThe loss on disposal of assets of approximately $49,000 for the six months ended June 30, 2001, is due to retiring assets for Park Place Apartments Phase II, that were not fully depreciated, as a result of the exterior paint and repair project.
14
Depreciation expense increased approximately $25,000, or 25%, and $52,000, or 26%, for the three months and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. The increase is primarily due to management's change in the estimated useful life of all of the roof assets at Park Place Apartments Phase II in July 2001. The increase is also due to building improvements (exterior remodeling, painting and intrusion alarms), water meter installations and clubhouse and fitness center remodeling at Park Place Apartments Phase II (all net of retirements).
Consolidated Cash Flows and Financial ConditionCash flows provided by (used in):
Six Months Ended
June 30,
-------------------------------------------
2002 2001
------------------- -------------------
Operating activities $ 136,355 $ 253,627
Investing activities (48,418) (131,477)
Financing activities (81,665) (18,752)
------------------- -------------------
Net increase in cash and equivalents $ 6,272 $ 103,398
=================== ===================
Net cash provided by operating activities decreased approximately $117,000, or 46%, for the six months ended June 30, 2002, as compared to the same period in 2001. The decrease is primarily driven by the changes in accounts receivable and accounts payable.
The decrease of approximately $83,000, or 63%, in net cash used in investing activities for the six months ended June 30, 2002, as compared to the same period in 2001, was primarily the result of the changes in investments in and advances to the joint venture and to a decrease in capital expenditures at Park Place Apartments Phase II, partially offset by increased capital expenditures at Park at the Willows.
The increase of approximately $63,000 in net cash used in financing activities for the six months ended June 30, 2002, was primarily due to loan proceeds received in 2001. The increase is also a result of the regular principal payments on the two notes payable made in 2001.
Due to the fact that no distributions were made during the six months ended June 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 primary source of future liquidity is expected to be derived from cash generated by our properties after adequate cash reserves are established for future leasing, roof replacement and renovation costs. It is anticipated that the cash flows from operations and cash reserves will be sufficient to meet our needs. Cash reserves (which are unrestricted cash and equivalents as shown on our balance sheet) were $437,504 at June 30, 2002.
15
The demand on future liquidity is anticipated to increase as a result of the replacement of the roofs at Park Place Apartments Phase II (18 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 $48,000 increase in depreciation expense for the six months ended June 30, 2002. We do not have sufficient working capital to make all of the roof replacements at one time. As of June 30, 2002, one roof replacement has been completed. The total cost of replacing the remaining roofs is estimated to be $340,000 ($20,000 per building). No roof replacements have been budgeted in 2002, as no failures are anticipated. Roof replacements will be made as each roof fails and as working capital permits.
Blankenbaker Business Center 1A is expected to require a new roof in 2003. The roof replacement is expected to cost approximately $190,000. Our share of this cost is expected to be approximately $60,000.
Future liquidity will also be affected by increased insurance expense. We have budgeted for an increase of approximately 25% upon renewal of our policies in September 2002, as compared to 2001.
In an effort to continue to improve occupancy levels 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 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 works with current residents on lease renewals.
The lease at Blankenbaker Business Center 1A provides for the tenant to contribute toward the payment of common area expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that apartment leases are generally for a period of one year, should protect our operations from the impact of inflation and changing prices.
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
16
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. Our two notes payable bear interest at the Prime Rate. Our mortgage payable bears interest at a fixed 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 $201,000 decrease in the fair value of debt.
17
Item 1 - Legal Proceedings
None.
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.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits:
99.1 Certification of Chief Executive Officer of the General Partner
99.2 Certification of Chief Financial Officer of the General Partner
b) Reports on Form 8-K:
Form 8-K was filed on May 29, 2002 to report in Item 4 that we have elected to change our
independent public accountant. This Form 8-K was amended on June 12, 2002.
18
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 VII, LTD. | |||
|---|---|---|---|
| By: | NTS-Properties Associates VII, | ||
| 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: August 14, 2002 |
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