For the quarterly period ended March 31, 2004
OR
Commission File Number 0-17589
NTS-PROPERTIES VII, LTD.
(Exact name of registrant as specified in its charter)
| Florida | 61-1119232 |
| (State or other jurisdiction of | (I.R.S. 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). Yes [ ] No [X]
| Pages |
| Item 1. | Financial Statements | |||
| Balance Sheets as of March 31, 2004 and December 31, 2003 | 4 | |||
| Statement of Partners' Equity as of March 31, 2004 | 4 | |||
| Statements of Operations for the Three Months Ended March 31, 2004 and 2003 | 5 | |||
| Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 | 6 | |||
| Notes to Financial Statements | 7-12 | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13-19 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | ||
| Item 4. | Controls and Procedures | 19 | ||
| Items 1 - 6 | 20-21 | |||
| Signatures | 22 |
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, or may not, 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, 2003. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
3
As of As of
March 31, December 31,
2004 2003
------------------ -----------------
(UNAUDITED)
ASSETS
Cash and equivalents $ 169,028 $ 263,655
Cash and equivalents - restricted 27,050 26,625
Accounts receivable, net 3,006 4,577
Land, buildings and amenities, net 6,989,413 7,091,886
Investment in and advances to joint venture 806,390 789,567
Other assets 44,712 46,021
------------------ -----------------
TOTAL ASSETS $ 8,039,599 $ 8,222,331
================== =================
LIABILITIES AND PARTNERS' EQUITY
Mortgage payable $ 3,299,607 $ 3,339,017
Accounts payable 136,505 184,617
Security deposits 26,850 26,700
Other liabilities 43,554 22,572
------------------ -----------------
TOTAL LIABILITIES 3,506,516 3,572,906
COMMITMENTS AND CONTINGENCIES (Note 10)
PARTNERS' EQUITY 4,533,083 4,649,425
------------------ -----------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 8,039,599 $ 8,222,331
================== =================
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 (3,074,747) (31,057) (3,105,804)
Net loss - current year (115,179) (1,163) (116,342)
Cash distributions declared to date (2,717,046) (27,445) (2,744,491)
Repurchase of limited partnership interests (436,080) -- (436,080)
----------------- ------------------ ------------------
BALANCES ON MARCH 31, 2004 $ 4,592,648 $ (59,565)$ 4,533,083
================= ================== ==================
The accompanying notes to financial statements are an integral part of these statements.
4
Three Months Ended
March 31,
-------------------------------------
2004 2003
------------------ -----------------
REVENUES
Rental income $ 385,305 $ 431,371
------------------ -----------------
TOTAL REVENUES 385,305 431,371
------------------ -----------------
EXPENSES
Operating expenses 104,682 97,940
Operating expenses - affiliated 72,941 72,966
Management fees 19,450 22,600
Real estate taxes 19,908 21,846
Professional and administrative expenses 116,106 60,549
Professional and administrative expenses - affiliated 33,713 29,483
Depreciation and amortization 102,473 101,402
------------------ -----------------
TOTAL OPERATING EXPENSES 469,273 406,786
------------------ -----------------
OPERATING (LOSS) INCOME (83,968) 24,585
Interest and other income 819 1,423
Interest expense (60,940) (63,895)
Income from investment in joint venture 27,747 28,543
------------------ -----------------
Net loss $ (116,342)$ (9,344)
================== =================
Net loss allocated to the limited partners $ (115,179)$ (9,251)
================== =================
Net loss per limited partnership interest $ (0.21) $ (0.02)
================== =================
Weighted average number of limited partnership interests 552,236 552,236
================== =================
The accompanying notes to financial statements are an integral part of these statements.
5
Three Months Ended
March 31,
--------------------------------------
2004 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (116,342)$ (9,344)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 103,253 102,182
Income from investment in joint venture (27,747) (28,543)
Changes in assets and liabilities:
Cash and equivalents - restricted (425) (900)
Accounts receivable 1,571 2,604
Other assets 529 (117)
Accounts payable (48,112) 38,980
Security deposits 150 1,750
Other liabilities 20,982 19,300
----------------- -----------------
Net cash (used in ) provided by operating activities (66,141) 125,912
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from joint venture, net 10,924 914
----------------- -----------------
Net cash provided by investing activities 10,924 914
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage and note payable (39,410) (42,910)
----------------- -----------------
Net cash used in financing activities (39,410) (42,910)
----------------- -----------------
Net (decrease) increase in cash and equivalents (94,627) 83,916
CASH AND EQUIVALENTS, beginning of period 263,655 382,533
----------------- -----------------
CASH AND EQUIVALENTS, end of period $ 169,028 $ 466,449
================= =================
Interest paid on a cash basis $ 60,990 $ 63,243
================= =================
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 2003 annual report on Form 10-K as filed with the Securities and Exchange Commission on March 26, 2004. 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 months ended March 31, 2004 and 2003. 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.
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.
7
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 March 31, 2004, approximately $105,000 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, 7-30 years for buildings and improvements and 5-30 years for amenities. The aggregate cost of our properties for federal tax purposes is approximately $12,847,000.
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. There were no impairment losses during any of the periods presented.
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 March 31, 2004 and 2003, BBC 1A had total revenues of $237,253 and $237,253, respectively, and net income of $88,535 and $91,077, respectively.
8
Mortgage payable consists of the following:
March 31, December 31,
2004 2003
----------------- -----------------
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. $ 3,299,607 $ 3,339,017
================= =================
Our mortgage may be prepaid but is subject to a yield-maintenance premium.
As of March 31, 2004, the fair value of long-term debt was approximately $3,369,000, based on the borrowing rates currently available to us for mortgages with similar terms and average maturities.
Pursuant to an agreement with us, NTS Development Company, an affiliate of our General Partner, receives property management fees on a monthly basis. The monthly fees are 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 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 three months ended March 31, 2004 and 2003. 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.
Three Months Ended
March 31,
----------------------------------------
2004 2003
------------------- -------------------
Property management fees $ 19,450 $ 22,600
------------------- -------------------
Property management 40,979 39,135
Leasing 6,758 7,525
Administrative - operating 24,646 21,153
Other 558 5,153
------------------- -------------------
Total operating expenses - affiliated 72,941 72,966
------------------- -------------------
Professional and administrative expenses - affiliated 33,713 29,483
------------------- -------------------
Total related party transactions $ 126,104 $ 125,049
=================== ===================
9
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 on properties that we may acquire in the future.
We are jointly and severally liable under the mortgage loan agreement for the BBC 1A debt. The outstanding balance on this mortgage on March 31, 2004 is $1,042,616. 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 (the “Superior Court”) originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) against the general partners (the “General Partners”) of NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI and NTS-Properties VII, Ltd. (the “Partnerships”), as well as several individuals and entities affiliated with us. The action purports to bring claims on behalf of a class of limited partners. These claims are based on, among other things, tender offers made by the Partnerships and an affiliate of the General Partners, as well as the operation of the Partnerships by the General Partners. 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 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 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 certain of the General Partners and several individuals and entities affiliated with us. The complaint was amended to include the general partner of NTS-Properties III and the general partner of NTS-Properties Plus Ltd., which 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 the Partnerships based on alleged overpayment of fees, prohibited investments, improper failures to make distributions, purchases of limited partnerships 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 Partnerships, a declaratory judgment and 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.
10
On June 20, 2003, the General Partners reached an agreement in principle with the representatives of the class of plaintiffs to settle the Buchanan litigation. This agreed upon settlement includes releases for all of the parties for all of the claims asserted in the Buchanan litigation and the Bohm litigation. As part of the agreed upon settlement, the General Partners agreed to pursue a merger of the Partnerships and other real estate entities affiliated with the General Partners into a newly-formed entity named NTS Realty Holdings Limited Partnership (“NTS Realty”).
On December 5, 2003, the General Partners, certain of their affiliates and the class of plaintiffs in the Buchanan litigation jointly filed a Stipulation and Agreement of Settlement (the “Settlement Agreement”) with the Superior Court. The Settlement Agreement sets forth in writing the terms of the agreed upon settlement the parties reached on June 20, 2003. On February 26, 2004, the Superior Court preliminarily approved the Settlement Agreement as within the range of reasonableness and that it is fair, just and adequate to the class of plaintiffs. The Superior Court scheduled a hearing to finally determine whether the Settlement Agreement is in the best interests of the class of plaintiffs and whether the Buchanan litigation should be dismissed with prejudice.
On March 2, 2004, we, along with all defendants, filed a Motion to Dismiss the Bohm litigation. The Motion is currently pending before the court.
On May 6, 2004, the Superior Court granted its final approval of the Settlement Agreement. At the final hearing, any member of the class of plaintiffs was given the opportunity to object to the final approval of the Settlement Agreement, the entry of a final judgment dismissing with prejudice the Buchanan litigation, or an application of an award for attorneys’ fees and expenses to plaintiffs’ counsel. The Superior Court’s order provides, among other things, that: (1) the Settlement Agreement, and all transactions contemplated thereby, including the proposed merger of the Partnerships into NTS Realty, are fair, reasonable and adequate, and in the best interests of the class of plaintiffs; (2) the plaintiffs’ complaint and each and every cause of action and claim set forth therein is dismissed with prejudice; (3) each class member is barred from (a) transferring, selling or otherwise disposing of (other than by operation of law) their interests until the earlier of the closing date of the merger, the termination of the settlement or June 30, 2004; and (4) each class member who requested to be excluded from the settlement released their claims in the Bohm litigation.
For the three months ended March 31, 2004, our share of the legal costs for the Buchanan and Bohm litigations was approximately $29,000, 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.
11
Proposed Merger
As part of the Settlement Agreement, our general partner and the general partners of the four public partnerships affiliated with us, have agreed to pursue a merger of the partnerships and several other affiliated real estate entities into a newly formed limited partnership known as NTS Realty. The merger is subject to, among other things, approval by a majority of the limited partner interests in each partnership. We may not seek the approval of the limited partners until a filing made by NTS Realty with the Securities and Exchange Commission is declared effective. For the three months ended March 31, 2004, our share of the legal and professional fees for the proposed merger was approximately $64,000.
On February 4, 2004, NTS Realty filed a joint consent solicitation statement/prospectus on Form S-4 with the Securities and Exchange Commission. The solicitation statement/prospectus presents the merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V; NTS-Properties VI; and NTS-Properties VII, Ltd. with NTS Realty. Concurrent with the merger, ORIG, LLC, a Kentucky limited liability company, which is affiliated with our general partner, will contribute substantially all its real estate assets and all of its liabilities to NTS Realty.
Our reportable operating segments include only one segment — Apartment Community Operations.
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Financial Statements in Item 1 and the cautionary statements below.
General
A critical accounting policy is one that would materially effect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
Impairment and Valuation
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. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
13
Recognition of Rental Income
Our apartment communities have operating leases with apartment residents with terms generally of twelve months or less. We recognize rental revenue related to these leases on an accrual basis when due from residents. In accordance with our standard lease terms, rental payments are generally due on a monthly basis.
Cost Capitalization and Depreciation Policies
We review all expenditures and capitalize any item exceeding $1,000 deemed to be an upgrade or a tenant improvement with an expected useful life greater than one year. Land, buildings and amenities are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements have estimated useful lives between 7-30 years, land improvements have estimated useful lives of between 7-30 years and amenities have estimated useful lives between 5-30 years.
The following tables include our selected summarized operating data for the three months ended March 31, 2004 and 2003. This data is presented to provide assistance in identifying trends in our operating results and other factors affecting our business. 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
March 31,
---------------------------------------
2004 2003
---------------------------------------
Total revenues $ 385,305 $ 431,371
Operating expenses and operating
expenses - affiliated 177,623 170,906
Depreciation and amortization 102,473 101,402
Interest expense 60,940 63,895
Net loss (116,342) (9,344)
Rental income and tenant reimbursements generated by our properties and joint venture for the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
-------------------------------------
2004 2003
------------------ -----------------
Wholly-Owned Properties
The Park at the Willows $ 80,372 $ 83,918
Park Place Apartments Phase II $ 304,933 $ 347,453
Joint Venture Property
(Ownership % on March 31, 2004)
Blankenbaker Business Center 1A (31.34%) $ 237,253 $ 237,253
14
We believe the changes in rental income and tenant reimbursements from period to period are temporary effects of each property's specific mix of lease maturities and are not indicative of any known trend.
The occupancy levels at our properties and joint venture as of March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
-------------------------------------
2004 2003
------------------ -----------------
Wholly-Owned Properties
The Park at the Willows 92% 92%
Park Place Apartments Phase II 80% 93%
Joint Venture Properties
(Ownership % on March 31, 2004)
Blankenbaker Business Center 1A (31.34%) 100% 100%
We believe the changes in occupancy on March 31 from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
The average occupancy levels at our properties and joint ventures for the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
-------------------------------------
2004 2003
------------------ -----------------
Wholly-Owned Properties
The Park at the Willows 92% 94%
Park Place Apartments Phase II 80% 91%
Joint Venture Properties
(Ownership % on March 31, 2004)
Blankenbaker Business Center 1A (31.34%) 100% 100%
We believe the changes in average occupancy from period to period are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
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 lease at Blankenbaker Business Center 1A provides for the tenant to contribute toward the payment of common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that residential leases are generally for a period of one year, should protect our operations from the impact of inflation and changing prices.
The following discussion relating to changes in our results of operations includes only material line items within our Statements of Operations or line items for which there was a material change between the three months ending March 31, 2004 and 2003.
Rental Income
Rental income for the three months ended March 31, 2004 and 2003 was approximately $385,000 and $431,000, respectively. The decrease of approximately $46,000, or 11%, was primarily the result of decreased average occupancy at Park Place Apartments Phase II and The Park at the Willows.
Operating Expenses and Operating Expenses – Affiliated
Our operating expenses did not change significantly between the three months ended March 31, 2004 and 2003. There were no offsetting material changes.
Operating expenses – affiliated did not change significantly between the three months ended March 31, 2004 and 2003. There were no offsetting material changes.
Operating expenses – affiliated are for the 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 and Professional and Administrative Expenses –Affiliated
Professional and administrative expenses for the three months ended March 31, 2004 and 2003 were approximately $116,000 and $61,000, respectively. The increase of approximately $55,000, or 90%, was primarily the result of increased legal and professional fees related to our proposed merger and litigation filed by limited partners. See Item 1 — Note 10 for information regarding our proposed merger and litigation filed by limited partners.
Professional and administrative expenses – affiliated for the three months ended March 31, 2004 and 2003 were approximately $34,000 and $29,000, respectively. The increase of approximately $5,000, or 17%, was primarily the result of increased personnel costs.
16
Professional and administrative expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Depreciation and Amortization Expense
Our depreciation and amortization expenses did not change significantly between the three months ended March 31, 2004 and 2003. There were no offsetting material changes.
Interest Expense
Our interest expense did not change significantly between the three months ended March 31, 2004 and 2003. There were no offsetting material changes.
Liquidity and Capital Resources
The following table sets forth the cash provided by or used in operating activities, investing activities and financing activities for the three months ended March 31, 2004 and 2003.
Cash flows (used in) provided by:
Three Months Ended
March 31,
-----------------------------------------
2004 2003
------------------ -------------------
Operating activities $ (66,141)$ 125,912
Investing activities 10,924 914
Financing activities (39,410) (42,910)
------------------ -------------------
Net (decrease) increase in cash and equivalents $ (94,627)$ 83,916
================== ===================
Net cash provided by operating activities was approximately $126,000 for the three months ended March 31, 2003. Net cash used by operating activities for the three months ended March 31, 2004 was approximately $66,000. The increase in net cash used was primarily driven by reduced earnings from operations before non cash items and the change in accounts payable. The decreased accounts payable includes payments for professional services related to our litigation filed by limited partners and our proposed merger.
Net cash provided by investing activities increased from approximately $1,000 for the three months ended March 31, 2003, to approximately $11,000 for the three months ended March 31, 2004. The increase in net cash used was primarily due to increased investment in the joint venture.
Net cash used in financing activities decreased from approximately $43,000 for the three months ended March 31, 2003 to approximately $39,000 for the three months ended March 31, 2004. The decrease was primarily the result of decreased principal payments made in 2004.
17
Due to the fact that no distributions were made during the three months ended March 31, 2004 or 2003, the table which presents that portion of the distributions that represents a return of capital in accordance with GAAP 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 flow from operations combined with our cash reserves will be sufficient to meet these needs. Cash reserves (which are unrestricted cash and equivalents as shown on our balance sheet) were $169,028 on March 31, 2004.
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 to the joint venture. 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 March 31, 2004, fifteen 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.
We have no other material commitments for renovations or capital expenditures as of March 31, 2004.
18
Proposed Merger
As part of the Settlement Agreement, our general partner and the general partners of the four public partnerships affiliated with us, have agreed to pursue a merger of the partnerships and several other affiliated real estate entities into a newly formed limited partnership known as NTS Realty Holdings Limited Partnership (“NTS Realty”). The merger is subject to, among other things, approval by a majority of the limited partner interests in each partnership. We may not seek the approval of the limited partners until a filing made by NTS Realty with the Securities and Exchange Commission is declared effective. For the three months ended March 31, 2004, our share of the legal and professional fees for the proposed merger was approximately $64,000.
On February 4, 2004, NTS Realty filed a joint consent solicitation statement/prospectus on Form S-4 with the Securities and Exchange Commission. The solicitation statement/prospectus presents the merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V; NTS-Properties VI; and NTS-Properties VII, Ltd. with NTS Realty. Concurrent with the merger, ORIG, LLC, a Kentucky limited liability company, which is affiliated with our general partner, will contribute substantially all its real estate assets and all of its liabilities to NTS Realty.
Website Information
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) or 15(d) 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 is 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 $161,000 decrease in the fair value of debt.
Our General Partner, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2004. There were no material changes in our internal controls over financial reporting during the first quarter of 2004.
19
On May 6, 2004, the Superior Court of the State of California for the County of Contra Costa granted its final approval of the Stipulation and Agreement of Settlement (the “Settlement Agreement”) jointly filed by the general partners (the “General Partners”) of NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI and NTS-Properties VII, Ltd. (the “Partnerships”), along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) on December 5, 2003. At the final hearing, any member of the class of plaintiffs was given the opportunity to object to the final approval of the Settlement Agreement, the entry of a final judgment dismissing with prejudice the Buchanan litigation, or an application of an award for attorneys’ fees and expenses to plaintiffs’ counsel. The Superior Court’s order provides, among other things, that: (1) the Settlement Agreement, and all transactions contemplated thereby, including the proposed merger of the Partnerships into NTS Realty Holdings Limited Partnership, are fair, reasonable and adequate, and in the best interests of the class of plaintiffs; (2) the plaintiffs’ complaint and each and every cause of action and claim set forth therein is dismissed with prejudice; (3) each class member is barred from (a) transferring, selling or otherwise disposing of (other than by operation of law) their interests until the earlier of the closing date of the merger, the termination of the settlement or June 30, 2004; and (4) each class member who requested to be excluded from the settlement released their claims in the Bohm litigation.
Items 2 through 5 are omitted because these items are inapplicable or the answers to the items are negative.
| Exhibit No. | ||
| 3 | Amended and Restated Agreement and Certificate | * |
| of Limited Partnership of NTS-Properties VII, Ltd., | ||
| a Florida limited partnership. | ||
| 10 | Property Management Agreement and Construction | * |
| Agreement between NTS Development Company and | ||
| NTS-Properties VII, Ltd., a Florida limited partnership. | ||
| 14 | Code of Ethics | ** |
| 31.1 | Certification of Chief Executive Officer Pursuant to | *** |
| Rule 13a-14(a) and Rule 15d-14(a) of the Securities | ||
| Exchange Act, as amended. |
20
| 31.2 | Certification of Chief Financial Officer Pursuant to | *** |
| Rule 13a-14(a) and Rule 15d-14(a) of the Securities | ||
| Exchange Act, as amended. | ||
| 32.1 | Certification of Chief Executive Officer Pursuant to | *** |
| 18 U.S.C. 1350, as adopted pursuant to Section 906 | ||
| of the Sarbanes-Oxley Act of 2002. | ||
| 32.2 | Certification of Chief Financial Officer Pursuant to | *** |
| 18 U.S.C. 1350, as adopted 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. |
| ** | See www.ntsdevelopment.com for our code of ethics. |
| *** | Attached as an exhibit with this Form 10-Q. |
We filed a Form 8-K on February 2, 2004, to inform investors of an offer by CMG Partners, LLC to purchase their interests in NTS-Properties VII, Ltd. for $5.75 per interest in cash. We also informed the investors that we recommended a rejection of the offer and provided reasons for our recommendation.
We filed a Form 8-K on February 6, 2004, to announce that NTS Realty Holdings Limited Partnership filed a Form S-4, which included a joint consent solicitation statement/prospectus, with the Securities and Exchange Commission on February 4, 2004.
We filed a Form 8-K on March 1, 2004, to announce the preliminary approval of the settlement with the class of plaintiffs in the action originally captioned Buchanan et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) by the Superior Court of the State of California for the County of Contra Costa.
We filed a Form 8-K on May 10, 2004, to announce the final approval of the settlement with the class of plaintiffs in the action originally captioned Buchanan et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) by the Superior Court of the State of California for the County of Contra Costa.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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: May 13, 2004 |
22