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 0-17589
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 September 30, 2002 and December 31, 2001 | 3 | |||
| Statement of Partners' Equity as of September 30, 2002 | 3 | |||
| Statements of Operations for the Three Months and | ||||
| Nine Months Ended September 30, 2002 and 2001 | 4 | |||
| Statements of Cash Flows for the Nine Months Ended | ||||
| September 30, 2002 and 2001 | 5 | |||
| Notes to Financial Statements | 6-11 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 12-18 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 | ||
| Item 4. | Controls and Procedures | 18 |
PART II
| Item 1. | Legal Proceedings | 19 | ||
| Item 2. | Changes in Securities | 19 | ||
| Item 3. | Defaults Upon Senior Securities | 19 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 19 | ||
| Item 5. | Other Information | 19 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 19 | ||
| Signatures | 20 | |||
| Certifications | 21-22 |
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
NTS-PROPERTIES VII, LTD.
BALANCE SHEETS
As of As of
September 30, December 31,
2002 2001*
----------------- ------------------
(UNAUDITED)
ASSETS
- ------
Cash and equivalents $ 485,661 $ 431,232
Cash and equivalents - restricted 29,300 23,568
Accounts receivable 4,496 1,173
Land, buildings and amenities, net 7,401,877 7,730,705
Investment in and advances to joint venture 636,417 572,171
Other assets 52,471 62,034
----------------- ------------------
TOTAL ASSETS $ 8,610,222 $ 8,820,883
================= ==================
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Mortgage and notes payable $ 3,536,894 $ 3,659,778
Accounts payable 78,349 97,604
Security deposits 29,300 23,375
Other liabilities 108,123 8,686
----------------- ------------------
TOTAL LIABILITIES 3,752,666 3,789,443
COMMITMENTS AND CONTINGENCIES (Note 11)
PARTNERS' EQUITY 4,857,556 5,031,440
----------------- ------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 8,610,222 $ 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 (172,145) (1,739) (173,884)
Cash distributions declared to date (2,717,046) (27,445) (2,744,491)
Repurchase of limited partnership Interests (436,080) -- (436,080)
----------------- ------------------ ------------------
BALANCES AT SEPTEMBER 30, 2002 $ 4,913,877 $ (56,321)$ 4,857,556
================= ================== ==================
* Reference is made to the audited financial statements in the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on 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 Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES
- --------
Rental income $ 382,930 $ 389,370 $ 1,106,066 $ 1,150,843
Interest and other income 2,414 851 6,402 12,003
Income from investment in joint venture 21,365 18,484 68,674 54,893
Gain on sale of assets 71 -- 364 --
------------- ------------- ------------- -------------
TOTAL REVENUES 406,780 408,705 1,181,506 1,217,739
------------- ------------- ------------- -------------
EXPENSES
- --------
Operating expenses 124,711 107,599 306,182 311,479
Operating expenses - affiliated 76,176 62,961 196,924 190,582
Loss on disposal of assets 1,587 -- 2,038 49,791
Interest expense 65,391 69,844 199,797 207,691
Management fees 19,582 20,102 57,030 59,396
Real estate taxes 22,241 21,888 65,132 66,791
Professional and administrative expenses 29,576 11,978 68,058 53,980
Professional and administrative expenses -
affiliated 27,438 24,720 84,545 75,070
Depreciation and amortization 125,606 124,847 375,684 323,334
------------- ------------- ------------- -------------
TOTAL EXPENSES 492,308 443,939 1,355,390 1,338,114
------------- ------------- ------------- -------------
Net loss $ (85,528)$ (35,234)$ (173,884) $ (120,375)
============= ============= ============= =============
Net loss allocated to the limited partners $ (84,673)$ (34,882)$ (172,145) $ (119,171)
============= ============= ============= =============
Net loss per limited partnership Interest $ (0.15)$ (0.06)$ (0.31) $ (0.22)
============= ============= ============= =============
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)
Nine Months Ended
September 30,
---------------------------------------
2002 2001
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (173,884) $ (120,375)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for doubtful accounts -- 2,487
Write-off of uncollectible accounts receivable -- (1,151)
Loss on disposal of assets 2,038 49,791
Gain on sale of assets (364) --
Depreciation and amortization 378,025 325,673
Income from investment in joint venture (68,674) (54,893)
Changes in assets and liabilities:
Cash and equivalents - restricted (5,732) (6,000)
Accounts receivable (3,323) 60,388
Other assets 7,222 16,361
Accounts payable (19,255) 41,101
Security deposits 5,925 (150)
Other liabilities 99,437 63,950
----------------- ------------------
Net cash provided by operating activities 221,415 377,182
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Proceeds from sale of assets 364 --
Additions to land, buildings and amenities (48,894) (103,263)
Investment in and advances to joint venture 4,428 (51,516)
----------------- ------------------
Net cash used in investing activities (44,102) (154,779)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from notes payable -- 51,060
Principal payments on mortgage and notes payable (122,884) (108,055)
----------------- ------------------
Net cash used in financing activities (122,884) (56,995)
Net increase in cash and equivalents 54,429 165,408
CASH AND EQUIVALENTS, beginning of period 431,232 307,173
----------------- ------------------
CASH AND EQUIVALENTS, end of period $ 485,661 $ 472,581
================= ==================
Interest paid on a cash basis $ 199,233 $ 207,090
================= ==================
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 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 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 venture.
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.
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
6
September 30, 2002, approximately $325,000 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.
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 September 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 September 30, 2002 and 2001, Blankenbaker Business Center 1A had total revenues of $237,406 and $232,307, respectively, and net income of $68,172 and $66,561, respectively.
For the nine months ended September 30, 2002 and 2001, Blankenbaker Business Center 1A had total revenues of $714,851 and $703,002, respectively, and net income of $219,126 and $197,911, respectively.
7
On May 10, 2002, ORIG, LLC, ("ORIG") an affiliate of ours, commenced a tender offer to purchase up to 20,000 Interests at a price of $6.00 per Interest. ORIG had the option to acquire additional Interests on a pro rata basis if more than 20,000 Interests were tendered. The tender offer was scheduled to expire on August 16, 2002.
On August 7, 2002, ORIG amended its tender offer to extend the expiration date from August 16, 2002, to September 16, 2002. The tender offer was amended on September 5, 2002, to increase the purchase price to $6.50 per Interest and increase the number of Interests to 50,000. This amendment also extended the expiration date to October 1, 2002. We did not participate in this tender offer.
Detailed information on ORIG's tender offer, including the amendments to the offer and the final results of the offer, is available from the various filings made by ORIG with the Securities and Exchange Commission in connection with the offer.
Note 9 - Mortgage and Notes PayableMortgage and notes payable consist of the following:
September 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. $ 3,524,379 $ 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 September 30, 2002, the interest rate was
6.00%. 9,350 24,169
Note payable to a bank, bearing interest at the
Prime Rate, but not less than 6.00%, due March 27,
2003. At September 30, 2002, the interest rate was
6.00%. 3,165 8,181
------------------ -------------------
$ 3,536,894 $ 3,659,778
================== ===================
As of September 30, 2002, the fair value of long-term debt is approximately $3,818,000, based on the borrowing rates currently available to us for mortgages with similar terms and average maturities.
8
Pursuant 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 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 $ 57,030 $ 59,396
----------------- ------------------
Property management 113,469 114,816
Leasing 24,673 22,051
Administrative - operating 57,768 52,684
Other 1,014 1,031
----------------- ------------------
Total operating expenses - affiliated 196,924 190,582
----------------- ------------------
Professional and administrative expenses - affiliated 84,545 75,070
----------------- ------------------
Repairs and maintenance fee 2,235 1,563
Construction management 1,547 --
----------------- ------------------
Total related party transactions capitalized 3,782 1,563
----------------- ------------------
Total related party transactions $ 342,281 $ 326,611
================= ==================
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,
9
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 $22,000, 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 13 - Subsequent Events).
We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our financial position or results of operations except as discussed herein.
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 increase of $72,000 and $24,000 in depreciation expense for the nine months ended September 30, 2002, and 2001, respectively. We do not have sufficient working capital to make all the roof replacements at one time. As of September 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.
10
On October 1, 2002, the tender offer of ORIG, LLC, described in Note 8 expired. Upon expiration, 43,607 Interests had been tendered. The Offeror accepted all 43,607 Interests, without proration. ORIG purchased 43,607 Interests for $283,446 and incurred $3,075 in expenses associated with the tender offer.
On October 22, 2002, in a lawsuit filed in December 2001 against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us, the court issued an order sustaining the demurrer of our General Partner and the general partners of two limited partnerships affiliated with us. The effect of this ruling is that our General Partner and these other two general partners are no longer parties to the lawsuit. On the same date the court overruled the demurrer of the general partner of two of the partnerships affiliated with us and one individual and two entities affiliated with us. The entities and individuals whose demurrers were overruled remain defendants in the lawsuit. For a description of the lawsuit, see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on 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 11 - Commitments and Contingencies).
11
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 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:
12
The occupancy levels at our properties and joint venture as of September 30, 2002 and 2001 were as follows:
Nine Months Ended September 30,
-----------------------------------------
2002 2001
----------------- -----------------
Wholly-Owned Properties
- -----------------------
The Park at the Willows 94% 90%
Park Place Apartments Phase II 86% 77%
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100%
The average occupancy levels at our properties and joint venture 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
- -----------------------
The Park at the Willows (1) 85% 92% 79% 92%
Park Place Apartments Phase II 85% 80% 80% 78%
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100% 100% 100%
13
Rental and other income generated by our properties and joint venture for the three months and nine months ended September 30, 2002 and 2001were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Wholly-Owned Properties
- -----------------------
The Park at the Willows $ 74,569 $ 88,918 $ 225,226 $ 272,155
Park Place Apartments Phase II $ 309,909 $ 298,707 $ 884,290 $ 881,073
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
Blankenbaker Business Center 1A (31.34%) $ 237,406 $ 232,307 $ 714,851 $ 703,002
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.
Ownership of Joint VenturesOn 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, Ltd. 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 September 30, 2001 to September 30, 2002, we have omitted any discussion concerning that item.
Income From Investment in Joint VentureIncome from joint venture increased approximately $14,000, or 25%, for the nine months ended September 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 increased approximately $17,000, or 16%, for the three months ended September 30, 2002, as compared to the same period in 2001. The increase is primarily the result of increased repairs and maintenance costs at Park Place Apartments Phase II (mainly interior painting and floor
14
covering, due to an increase in apartments needing preparations for occupancy). The increase is also a result of increased advertising costs at Park Place Apartments Phase II.
Operating Expenses - AffiliatedOperating expenses-affiliated increased approximately $13,000, or 21%, for the three months ended September 30, 2002, as compared to the same period in 2001. The increase is primarily due to increased commissions/bonuses paid to leasing agents as a result of efforts made to increase occupancy in 2002.
Loss on Disposal of AssetsThe loss on disposal of assets of approximately $50,000 for the nine months ended September 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.
Professional and Administrative ExpensesProfessional and administrative expenses increased approximately $18,000, and $14,000, or 26%, for the three months and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001. The increase is primarily due to an increase in legal fees paid under an indemnification agreement with our General Partner.
Depreciation ExpenseDepreciation expense increased approximately $52,000, or 16%, for the nine months ended September 30, 2002, respectively, as compared to the same period 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):
Nine Months Ended
September 30,
-------------------------------------------
2002 2001
------------------- -------------------
Operating activities $ 221,415 $ 377,182
Investing activities (44,102) (154,779)
Financing activities (122,884) (56,995)
------------------- -------------------
Net increase in cash and equivalents $ 54,429 $ 165,408
=================== ===================
15
Net cash provided by operating activities decreased approximately $156,000, or 41%, for the nine months ended September 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 $111,000, or 72%, in net cash used in investing activities for the nine months ended September 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 $66,000 in net cash used in financing activities for the nine months ended September 30, 2002, was primarily due to loan proceeds received in 2001. The increase is also a result of continued principal payments on mortgages and notes payable in 2002.
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 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 $485,661 at September 30, 2002.
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 increase in depreciation expense of $72,000 and $24,000 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, 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 $205,000. Our share of this cost is expected to be approximately $64,000.
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
16
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.
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.
Potential ConsolidationOur General Partner, along with the general partners of four other public limited partnerships affiliated with us, is investigating a consolidation of us with other entities affiliated with us. In addition to these entities, the consolidation would likely involve several private partnerships and other entities affiliated with us and our General Partner. The new combined entity would own all of the properties currently owned by the public limited partnerships, and the limited partners or other owners of these entities would receive an ownership interest in the combined entity. The number of ownership interests to be received by limited partners and the other owners of the entities participating in the consolidation would likely be determined based on the relative value of the assets contributed to the combined entity by each public limited partnership, reduced by any indebtedness assumed by the entity. The majority of the contributed assets would consist of real estate properties, whose relative values would be based on appraisals obtained at or near the consolidation date. The potential benefits of consolidating the entities include: reducing the administrative costs as a percentage of assets and revenues by reducing the number of public entities; diversifying limited partners' investments in real estate to include additional markets and types of properties; and
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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 $207,000 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 sustaining the demurrer of our General Partner and the general partners of two limited partnerships affiliated with us. The effect of this ruling is that our General Partner and these other two general partners are no longer parties to the lawsuit. On the same date the court overruled the demurrer of the general partner of two of the partnerships affiliated with us and one individual and two entities affiliated with us. The entities and individuals whose demurrers were overruled remain defendants in the lawsuit. For a description of the lawsuit, see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on 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 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: 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 VII, General Partner of NTS-Properties VII
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 VII, General Partner of NTS-Properties VII
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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