For the quarterly period ended September 30, 2003
OR
Commission File Number 0-17589
| Florida | 61-1119232 |
| (State or other jurisdiction of | (IRS Employer Identification No.) |
| incorporation or organization) |
10172 Linn Station
Road, Louisville, Kentucky 40223
(Address of Principal Executive Offices)
(502)426-4800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
Yes [ ] No [X]
| Pages |
| Item 1. | Financial Statements | |||
| Balance Sheets as of September 30, 2003 and December 31, 2002 | 4 | |||
| Statement of Partners' Equity as of September 30, 2003 | 4 | |||
| Statements of Operations for the Three and Nine | ||||
| Months Ended September 30, 2003 and 2002 | 5 | |||
| Statements of Cash Flows for the Nine Months | ||||
| Ended September 30, 2003 and 2002 | 6 | |||
| Notes to Financial Statements | 7-13 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 14-20 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 | ||
| Item 4. | Controls and Procedures | 20 | ||
| Items 1 - 6 | 21 | |||
| Signatures | 22 | |||
| Exhibit Index | 23 |
2
Some of the statements included in this Quarterly Report on Form 10-Q, particularly those included in Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the 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. If these events do not occur, the result which we expected also may not occur, or may occur in a different manner which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our general partner’s best judgment based on known factors, but 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 described in our filings with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended December 31, 2002. Any forward-looking information provided by us pursuant to the safe harbor established by securities legislation should be evaluated in the context of these factors.
3
As of As of
September 30, December 31,
2003 2002
------------------- -------------------
(UNAUDITED)
ASSETS
Cash and equivalents $ 307,111 $ 382,533
Cash and equivalents - restricted 28,225 28,775
Accounts receivable 1,899 4,532
Land, buildings and amenities, net 7,192,552 7,299,579
Investment in and advances to joint venture 766,006 663,678
Other assets 60,216 53,133
------------------- -------------------
TOTAL ASSETS $ 8,356,009 $ 8,432,230
=================== ===================
LIABILITIES AND PARTNERS' EQUITY
Mortgage and notes payable $ 3,377,592 $ 3,494,218
Accounts payable 118,079 48,583
Security deposits 26,625 28,775
Other liabilities 98,552 40,910
------------------- -------------------
TOTAL LIABILITIES 3,620,848 3,612,486
COMMITMENTS AND CONTINGENCIES (Note 10)
PARTNERS' EQUITY 4,735,161 4,819,744
------------------- -------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 8,356,009 $ 8,432,230
=================== ===================
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 (2,906,131) (29,354) (2,935,485)
Net loss - current year (83,737) (846) (84,583)
Cash distributions declared to date (2,717,046) (27,445) (2,744,491)
Repurchase of limited partnership interests (436,080) -- (436,080)
----------------- ------------------ ------------------
BALANCES ON SEPTEMBER 30, 2003 $ 4,792,706 $ (57,545)$ 4,735,161
================= ================== ==================
The accompanying notes to financial statements are an integral part of these statements.
4
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
REVENUES
Rental income $ 398,423 $ 382,930 $ 1,257,056 $ 1,106,066
Interest and other income 2,258 2,414 5,150 6,402
Income from investment in joint venture 7,043 21,365 63,030 68,674
Gain on sale of assets -- 71 -- 364
------------- ------------- ------------- -------------
TOTAL REVENUES 407,724 406,780 1,325,236 1,181,506
------------- ------------- ------------- -------------
EXPENSES
Operating expenses 101,301 124,711 324,603 306,182
Operating expenses - affiliated 65,344 76,176 205,503 196,924
Loss on disposal of assets -- 1,587 -- 2,038
Interest expense 64,556 65,391 190,925 199,797
Management fees 19,514 19,582 63,811 57,030
Real estate taxes 15,924 22,241 59,616 65,132
Professional and administrative expenses 38,244 29,576 162,066 68,058
Professional and administrative expenses -
affiliated 34,757 27,438 98,193 84,545
Depreciation and amortization 102,557 125,606 305,102 375,684
------------- ------------- ------------- -------------
TOTAL EXPENSES 442,197 492,308 1,409,819 1,355,390
------------- ------------- ------------- -------------
Net loss $ (34,473)$ (85,528)$ (84,583) $ (173,884)
============= ============= ============= =============
Net loss allocated to the limited partners $ (34,128)$ (84,673)$ (83,737) $ (172,145)
============= ============= ============= =============
Net loss per limited partnership interest $ (0.06)$ (0.15)$ (0.15) $ (0.31)
============= ============= ============= =============
Weighted average number of limited
partnership interests 552,236 552,236 552,236 552,236
============= ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements.
5
Nine Months Ended
September 30,
-----------------------------------------
2003 2002
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (84,583)$ (173,884)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts 8,580 --
Write - off of uncollectible accounts receivable (15,088) --
Loss on disposal of assets -- 2,038
Gain on sale of assets -- (364)
Depreciation and amortization 307,442 378,025
Income from investment in joint venture (63,030) (68,674)
Changes in assets and liabilities:
Cash and equivalents - restricted 550 (5,732)
Accounts receivable 9,141 (3,323)
Other assets (9,424) 7,222
Accounts payable 69,496 (19,255)
Security deposits (2,150) 5,925
Other liabilities 57,642 99,437
------------------ -------------------
Net cash provided by operating activities 278,576 221,415
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets -- 364
Additions to land, buildings and amenities (198,074) (48,894)
Investment in and advances (to) from joint venture (39,298) 4,428
------------------ -------------------
Net cash used in investing activities (237,372) (44,102)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage and notes payable (116,626) (122,884)
------------------ -------------------
Net cash used in financing activities (116,626) (122,884)
Net (decrease) increase in cash and equivalents (75,422) 54,429
CASH AND EQUIVALENTS, beginning of period 382,533 431,232
------------------ -------------------
CASH AND EQUIVALENTS, end of period $ 307,111 $ 485,661
================== ===================
Interest paid on a cash basis $ 190,329 $ 199,233
================== ===================
The accompanying notes to financial statements are an integral part of these statements.
6
The unaudited financial statements included herein should be read in conjunction with NTS-Properties VII, Ltd.‘s 2002 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2003. In the opinion of our general partner, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been made to the accompanying financial statements for the three and nine months ended September 30, 2003 and 2002. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. As used in this Quarterly Report on Form 10-Q the terms “we,” “us” or “our,” as the context requires, may refer to NTS-Properties VII, Ltd. or its interests in its properties and joint venture.
The 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.
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 provides guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests and results of operations of a VIE are to be included in an entity’s consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual returns of the entity if they occur.
FIN 46 was effective immediately for new entities created or acquired after February 1, 2003, and will become effective for the period ending December 31, 2003 for entities in which we had a variable interest prior to February 1, 2003. We are presently evaluating the effect of this pronouncement.
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The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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.
We own and operate, through a joint venture, one commercial rental property — Blankenbaker Business Center 1A, 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 two apartment communities — The Park at the Willows, in Louisville, Kentucky and Park Place Apartments Phase II, in 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. 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.
Cash 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. Under an agreement with a bank, excess cash is invested in a repurchase agreement for U.S. government or agency securities each night. As of September 30, 2003, approximately $166,000 of our overnight investment was included in cash and equivalents.
Cash and equivalents — restricted represents funds received for residential security deposits.
Land, 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 $12,823,000.
8
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” specifies circumstances in which certain long-lived assets must be reviewed for impairment. If 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 during the period ended September 30, 2003, did not result in an impairment loss.
Blankenbaker 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 (“BBC 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 Joint Venture agreement was amended to admit NTS-Properties IV to the Joint Venture.
For the three months ended September 30, 2003 and 2002, BBC 1A had total revenues of $237,302 and $237,406, respectively, and net income of $22,472 and $68,172, respectively.
For the nine months ended September 30, 2003 and 2002, BBC 1A had total revenues of $712,031 and $714,851, respectively, and net income of $201,117 and $219,126, respectively.
Mortgage and notes payable consist of the following:
September 30, December 31,
2003 2002
------------------ -----------------
Mortgage payable to an insurance company in monthly
installments, bearing interest at a fixed rate of 7.37%, due
October 15, 2012, secured by land and buildings. $ 3,377,592 $ 3,488,518
Notes payable to a bank in monthly installments, bearing
interest at the Prime Rate, but not less than 6.00%, repaid in
March 2003. -- 5,700
------------------ -----------------
$ 3,377,592 $ 3,494,218
================== =================
As of September 30, 2003, the fair value of long-term debt is approximately $3,674,000, based on the borrowing rates currently available to us for mortgages with similar terms and average maturities.
Our mortgage may be prepaid but is subject to a yield-maintenance premium.
9
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 apartment communities. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of the costs incurred which relates 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, 2003 and 2002. 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,
-----------------------------------------
2003 2002
------------------ -------------------
Property management fees $ 63,811 $ 57,030
------------------ -------------------
Property management 118,249 113,469
Leasing 21,898 24,673
Administrative - operating 59,485 57,768
Other 5,871 1,014
------------------ -------------------
Total operating expenses - affiliated 205,503 196,924
------------------ -------------------
Professional and administrative expenses - affiliated 98,193 84,545
------------------ -------------------
Repair and maintenance fees 10,982 2,235
Construction management -- 1,547
------------------ -------------------
Total related party transactions capitalized 10,982 3,782
------------------ -------------------
Total related party transactions $ 378,489 $ 342,281
================== ===================
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Our compliance 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.
10
We are jointly and severally liable under the mortgage loan agreement for the BBC 1A debt. The outstanding balance on this mortgage on September 30, 2003 is $1,327,763. Our financial statements do not reflect a liability for this mortgage.
Litigation
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) 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 partnerships and an affiliate of our general partner. The plaintiffs allege, among other things, that the prices at which limited partnership 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 distribution of the proceeds. No amounts have been accrued as a liability for this action in our financial statements. Under an indemnification agreement with our general partner, we are responsible for the costs of defending any such action.
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle with representatives of the class of plaintiffs to settle the Buchanan action. This settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for any of the claims asserted in the Buchanan litigation and the Bohm litigation described below. As part of the proposed settlement, the general partners have agreed, among other things, to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed entity.
On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) against our general partner, the general partners of three public partnerships affiliated with us and several individuals and entities affiliated with us. On March 21, 2003, the complaint was amended to include the general partner of a public partnership affiliated with us and the general partner of a partnership that was affiliated with us but is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and affiliated public partnerships based on alleged overpayments of fees, prohibited investments, improper failures to make distributions, purchases of limited partnership interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the public partnerships, a declaratory judgment, and
11
injunctive relief. No amounts have been accrued as a liability for this action in our financial statements. Our general partner believes that this action is without merit, and is vigorously defending it.
On October 1, 2003, in the Bohm litigation the judge granted the defendants’ motion to extend a stay that had previously been agreed upon by the parties which expired on September 8, 2003. The stay will remain in effect only if the parties in the Buchanan litigation seek preliminary approval of a settlement of that litigation by November 19, 2003 and the final settlement of the Buchanan litigation includes releases relating to the Bohm litigation. If these two conditions are satisfied, the stay will become permanent when the Buchanan settlement is subject to a final, non-appealable order. For the nine months ended September 30, 2003, our share of the legal costs for the Buchanan and Bohm litigations was approximately $19,000, which was included in our professional and administrative expenses.
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.
Proposed Merger
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle with representatives of the class of plaintiffs to settle the action captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01- 05090). The action was originally filed in the Superior Court of the State of California for the County of Contra Costa against the general partners and several affiliated individuals and entities in December 2001. The settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for any of the claims asserted in the Buchanan litigation and the class action and derivative litigation filed in the Circuit Court of Jefferson County, Kentucky and captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI- 01740).
As part of the proposed settlement of the Buchanan and Bohm litigation, the general partners have agreed to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed partnership. The general partners would seek to list the limited partnership interests to be issued in the merger on a national securities exchange. The merger will be subject to, among other things, approval by holders of a majority of the limited partner interests in each partnership, final approval of the court in which the Buchanan litigation is pending and receipt by the general partners of an opinion regarding the fairness of the merger to the limited partners from a financial point of view. An independent appraiser has been retained to appraise all of the properties owned by the existing partnerships and affiliated entities that would be owned after the merger by the new partnership. The appraisal will be used in
12
establishing exchange values which will determine the number of interests that will be issued to each existing partnership in the merger. The interests in the newly-formed partnership will be subsequently distributed to the limited and general partners in each existing partnership as though each partnership had been liquidated. The general partners have also retained a third party to provide an opinion on the fairness of the merger to limited partners from a financial point of view. For the nine months ended September 30, 2003, our share of the legal and professional fees for the proposed merger was approximately $31,000.
Our reportable operating segments include only one segment — Apartment Community Operations.
13
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.
The accompanying financial statements were prepared in conformity with accounting principles generally accepted in the United States. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality.
Impairment
We review properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These circumstances include, but are not limited to, declines in cash flows, occupancy and comparable sales per square foot at the property. We would be required to recognize an impairment when a property’s estimated undiscounted cash flow is less than the carrying value of the property. To the extent an impairment has occurred, we charge to income the excess of the carrying value of the property over its estimated fair value. We may decide to sell properties that are held for use. The sales prices of these properties may differ from their carrying values.
The following table includes our selected summarized operating data for the three and nine months ended September 30, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto, in Part I, Item 1 of this report.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Total revenues $ 407,724 $ 406,780 $ 1,325,236 $ 1,181,506
Operating expenses and operating
expenses - affiliated 166,645 200,887 530,106 503,106
Interest expense 64,556 65,391 190,925 199,797
Depreciation and amortization 102,557 125,606 305,102 375,684
Net loss (34,473) (85,528) (84,583) (173,884)
14
Rental and other income generated by our properties and joint venture for the three and nine months ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Wholly-Owned Properties
The Park at the Willows $ 67,820 $ 74,569 $ 230,381 $ 225,226
Park Place Apartments Phase II $ 331,208 $ 309,909 $ 1,028,160 $ 884,290
Joint Venture Property
(Ownership % on September 30, 2003)
Blankenbaker Business Center 1A (31.34%) $ 237,302 $ 237,406 $ 712,031 $ 714,851
The occupancy levels at our properties and joint venture as of September 30, 2003 and 2002 were as follows:
2003 2002
------------------- -------------------
Wholly-Owned Properties
The Park at the Willows 79% 94%
Park Place Apartments Phase II 89% 86%
Joint Venture Property
(Ownership % on September 30, 2003)
Blankenbaker Business Center 1A (31.34%) 100% 100%
The average occupancy levels at our properties and joint venture for the three and nine months ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Wholly-Owned Properties
The Park at the Willows 76% 85% 83% 79%
Park Place Apartments Phase II 88% 85% 91% 80%
Joint Venture Property
(Ownership % on September 30, 2003)
Blankenbaker Business Center 1A (31.34%) 100% 100% 100% 100%
We are making efforts 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 works with current residents on lease renewals.
15
The following discussion relating to changes in our results of operations includes only those line items within our Statements of Operations for which there was a material change between the three and nine months ending September 30, 2002 and 2003.
Rental Income
Rental income increased approximately $151,000, or 14%, for the nine months ended September 30, 2003, as compared to the same period in 2002. The increase is primarily due to an increase in average occupancy at Park Place Apartments Phase II and The Park at the Willows.
Income from Investment in Joint Venture
Income from investment in joint venture decreased approximately $14,000, or 67%, for the three months ended September 30, 2003, as compared to the same period in 2002. The decrease is a result of decreased income at Blankenbaker Business Center 1A primarily the result of a loss on disposal of assets. The loss on disposal of assets can be attributed to the retirement of the roof which was not fully depreciated. The overall decrease is partially offset by decreased interest expense at Blankenbaker Business Center 1A, due to the decreased debt level.
Operating Expenses
Operating expenses decreased approximately $23,000, or 19%, for the three months ended September 30, 2003, as compared to the same period in 2002. The decrease is primarily the result of decreased repairs and maintenance costs and advertising costs at Park Place Apartments Phase II.
Operating Expenses — Affiliated
Operating expenses — affiliated decreased $11,000, or 14%, for the three months ended September 30, 2003, as compared to the same period in 2002. The decrease is primarily due to decreased leasing salaries and housekeeping salaries at Park Place Apartments Phase II. Operating expenses — affiliated are expenses incurred for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Professional and Administrative Expenses
Professional and administrative expense increased approximately $9,000 and $94,000 for the three and nine months ended September 30, 2003, respectively as compared to the same periods in 2002. The increase is primarily the result of increased legal and professional fees related to our proposed merger and litigation filed by limited partners. See the following discussion under the caption “Proposed Merger,” and Part II, Item 1 of this Form 10-Q.
16
Professional and Administrative Expenses – Affiliated
Professional and administrative expenses – affiliated increased approximately $14,000, or 16% for the nine months ended September 30, 2003, as compared to the same period in 2002. The increase is primarily the result of increased personnel costs for property management accounting. Professional and administrative expenses – affiliated are expenses incurred for services performed by employees of NTS Development Company, an affiliate of the General Partner.
Depreciation and Amortization
Depreciation and amortization decreased approximately $23,000, or 18%, and $71,000, or 19%, for the three and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002. The decrease is primarily the result of the roof assets at Park Place Apartments Phase II becoming fully depreciated by December 31, 2002.
The following table sets forth the cash provided by or used in operating activities, investing activities and financing activities for the nine months ended September 30, 2003 and 2002.
Cash flows provided by (used in):
Nine Months Ended
September 30,
----------------------------------------
2003 2002
------------------- -------------------
Operating activities $ 278,576 $ 221,415
Investing activities (237,372) (44,102)
Financing activities (116,626) (122,884)
------------------- -------------------
Net (decrease) increase in cash and equivalents $ (75,422)$ 54,429
=================== ===================
Cash Flows
Net cash provided by operating activities increased approximately $57,000, or 26%, for the nine months ended September 30, 2003, as compared to the same period in 2002. The increase is primarily driven by the change in accounts payable which was partially offset by the change in other liabilities.
The increase of approximately $193,000 in net cash used in investing activities for the nine months ended September 30, 2003, as compared to the same period in 2002, is mainly the result of increased capital expenditures for Park Place Apartments Phase II for roof replacements, and increased investments in the Blankenbaker Business Center Joint Venture.
17
Due to the fact that no distributions were made during the nine months ended September 30, 2003 or 2002, the table which presents that portion of the distributions that represents a return of capital in accordance with accounting principles generally accepted in the United States has been omitted.
Future Liquidity
We believe the current occupancy levels are considered adequate to fund the operations of our properties. However, our future liquidity depends significantly on our properties’ occupancy remaining 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, our ability to make payments due under our debt agreements and to continue paying daily operational costs would be greatly impaired. In addition, we may be required to obtain financing in connection with the capital improvements and leasing costs described below.
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 future cash flows from operations combined with our current cash reserves will be sufficient to meet these needs. Cash reserves (which are unrestricted cash and equivalents as shown on our balance sheet) were $307,111 on September 30, 2003.
We are aware that the sole commercial tenant of our joint venture’s commercial building is making efforts to seek alternatives to renewing its expiring lease. The failure of this tenant to renew its lease would result in a loss of annual rental revenue and operating expense recoveries of approximately $938,000. Income from our investment in the joint venture that owns this property would decrease accordingly. This would significantly affect our liquidity, and could result in significant costs to refurbish the vacated space and locate a new tenant. At this time, we are not certain whether the tenant intends to renew its lease as allowed by the lease agreement, or vacate its space.
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. We do not have sufficient working capital to make all of the roof replacements at one time. As of September 30, 2003, 15 roof replacements have been completed. The total cost of replacing the remaining roofs is estimated to be $60,000 ($20,000 per building). The three remaining roof replacements have been budgeted for 2004.
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We anticipate using cash provided by operations and cash reserves to fund a portion of the capital improvements and leasing costs described above. However, we believe that funding these expenses may also require existing financing or additional financing secured by our properties and there is no assurance that this financing will be available.
We have no other material commitments for renovations or capital expenditures as of September 30, 2003.
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle with representatives of the class of plaintiffs to settle the action captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01- 05090). The action was originally filed in the Superior Court of the State of California for the County of Contra Costa against the general partners and several affiliated individuals and entities in December 2001. The settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for any of the claims asserted in the Buchanan litigation and the class action and derivative litigation filed in the Circuit Court of Jefferson County, Kentucky and captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI- 01740).
As part of the proposed settlement, the general partners have agreed to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed partnership. The general partners would seek to list the limited partnership interests to be issued in the merger on a national securities exchange. The merger will be subject to, among other things, approval by holders of a majority of the limited partner interests in each partnership, final approval of the court in which the Buchanan litigation is pending and receipt by the general partners of an opinion regarding the fairness of the merger to the limited partners from a financial point of view. An independent appraiser has been retained to appraise all of the properties owned by the existing partnerships and affiliated entities that would be owned after the merger by the new partnership. The appraisal will be used in establishing exchange values which will determine the number of interests that will be issued to each existing partnership in the merger. The interests in the newly-formed partnership will be subsequently distributed to the limited and general partners in each existing partnership as though each partnership had been liquidated. The general partners have also retained a third party to provide an opinion on the fairness of the merger to limited partners from a financial point of view. For the nine months ended September 30, 2003, our share of the legal and professional fees for the proposed merger was approximately $31,000.
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Our website address is www.ntsdevelopment.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act are available and may be accessed free of charge through the “About NTS” section of our website as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not incorporated into this Quarterly Report on Form 10-Q.
Our primary market risk exposure with regard to financial instruments stems from changes in interest rates. Our mortgage payable bears interest at a fixed rate. A hypothetical 100 basis point increase in interest rates would result in an approximate $187,000 decrease in the fair value of debt.
The Chief Executive Officer and Chief Financial Officer of NTS Capital Corporation, the general partner of our general partner, have concluded, based on their evaluation as of September 30, 2003, 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 over financial reporting or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.
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On October 1, 2003, in the litigation against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) that is pending in the Circuit Court of Jefferson County, Kentucky, the judge granted the defendants’ motion to extend a stay that had previously been agreed upon by the parties which expired on September 8, 2003. The stay will remain in effect only if the parties in the litigation captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090), filed against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us that is pending in the Superior Court of the State of California, seek preliminary approval of a settlement of that litigation by November 19, 2003 and the final settlement of the Buchanan litigation includes releases relating to the Bohm litigation. If these two conditions are satisfied, the stay will become permanent when the Buchanan settlement is subject to a final, non-appealable order.
Items 2 through 5 are omitted because these items are inapplicable or the answers to the items are negative.
| (a) | Exhibits |
| (3) | Amended and Restated Agreement and Certificate of Limited Partnership of NTS-Properties VII, Ltd., a Florida limited partnership. * |
| (31.1) | Certification of Chief Executive Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** |
| (31.2) | Certification of Chief Financial Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** |
| (32.1) | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
| (32.2) | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
| (b) |
Reports on Form 8-K |
| * | Incorporated by reference to documents filed with the Securities and Exchange Commission in connection with the filing of the Registration Statements on Form S-11 on May 15, 1987 (effective October 29, 1987) under Commission File No. 33-14308. |
| ** | Attached as an exhibit to this Quarterly Report on Form 10-Q. |
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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/ Brian F. Lavin |
| Brian F. Lavin |
| President of NTS Capital Corporation |
| /s/ Gregory A. Wells |
| Gregory A. Wells |
| Chief Financial Officer of NTS Capital Corporation |
Date: November 13, 2003
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| Exhibit Number | Description of Document | ||
| 3 | Amended and Restated Agreement and Certificate of Limited Partnership of NTS-Properties VII, Ltd., a Florida limited partnership. * | ||
| 31.1 | Certification of Chief Executive Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** |
| 31.2 | Certification of Chief Financial Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
| * | Incorporated by reference to documents filed with the Securities and Exchange Commission in connection with the filing of the Registration Statements on Form S-11 on May 15, 1987 (effective October 29, 1987) under Commission File No. 33-14308. |
| ** | Attached as an exhibit to this Quarterly Report on Form 10-Q. |
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