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, 2000
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- -----------------------
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 incorporation (I.R.S. Employer
or organization) Identification No.)
10172 Linn Station Road
Louisville, Kentucky 40223
--------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(502) 426-4800
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days.
[X] Yes [ ] No
<PAGE>
TABLE OF CONTENTS
-----------------
PART I
------
Pages
-----
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 and December 31, 1999 3
Statement of Partners' Equity as of September 30, 2000 3
Statements of Operations for the three months and nine months ended
September 30, 2000 and 1999 4
Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 5
Notes to Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II
-------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------
<TABLE>
NTS-PROPERTIES VII, LTD.
------------------------
BALANCE SHEETS
--------------
<CAPTION>
As of As of
September 30, December 31
2000 1999*
------------------- -------------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Cash and equivalents $ 432,454 $ 400,262
Cash and equivalents - restricted 42,195 40,080
Accounts receivable 16,895 21,771
Land, buildings and amenities, net 9,462,999 9,688,537
Other assets 142,947 116,993
----------------- ------------------
TOTAL ASSETS $ 10,097,490 $ 10,267,643
================= ==================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Mortgages payable $ 4,667,088 $ 4,854,355
Accounts payable 96,289 97,355
Distributions payable 27,941 -
Security deposits 26,850 26,475
Other liabilities 113,805 24,646
----------------- ------------------
TOTAL LIABILITIES 4,931,973 5,002,831
COMMITMENTS AND CONTINGENCIES (Note 9)
PARTNERS' EQUITY 5,165,517 5,264,812
----------------- ------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 10,097,490 $ 10,267,643
================= ==================
</TABLE>
<TABLE>
STATEMENT OF PARTNERS' EQUITY
-----------------------------
<CAPTION>
Limited Partners General Partner Total
-------------------- -------------------- ---------------------
PARTNERS' EQUITY/(DEFICIT)
-------------------------
<S> <C> <C> <C>
Capital contributions, net of offering costs $ 10,935,700 $ 100 $ 10,935,800
Net loss - prior years (2,569,539) (25,954) (2,595,493)
Net loss - current year (217) (2) (219)
Cash distributions declared to date (2,717,046) (27,445) (2,744,491)
Repurchase of Limited Partnership Units (430,080) - (430,080)
------------------ ------------------ -------------------
BALANCES AT September 30, 2000 $ 5,218,818 $ (53,301) $ 5,165,517
================== ================== ===================
</TABLE>
* Reference is made to the audited financial statements in Form 10-K as filed
with the Securities and Exchange Commission on March 29, 2000.
The accompanying notes to financial statements are an integral part of these
statements.
3
<PAGE>
<TABLE>
NTS-PROPERTIES VII, LTD.
------------------------
STATEMENTS OF OPERATIONS
------------------------
(UNAUDITED)
-----------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
--------------- --------------- ------------- --------------
REVENUES
--------
<S> <C> <C> <C> <C>
Rental income $ 489,468 $ 514,892 $ 1,431,741 $ 1,460,339
Interest and other income 11,003 4,505 24,820 17,602
Gain on sale of assets - - 4,118 -
------------- ------------ ---------- ----------
TOTAL REVENUES 500,471 519,397 1,460,679 1,477,941
------------- ------------ ---------- ----------
EXPENSES
--------
Operating expenses 145,835 118,014 314,587 301,766
Operating expenses - affiliated 64,695 65,684 186,414 197,637
Loss on disposal of assets 34,690 - 54,608 -
Interest expense 89,524 94,775 270,724 286,203
Management fees 26,348 27,728 76,268 76,514
Real estate taxes 29,854 27,136 84,439 81,407
Professional and administrative expenses 13,983 31,454 66,546 79,956
Professional and administrative
expenses - affiliated 21,423 17,614 63,667 53,549
Depreciation and amortization 115,321 115,989 343,645 357,830
------------- ------------ ---------- ----------
TOTAL EXPENSES 541,673 498,394 1,460,898 1,434,862
------------- ------------ ---------- ----------
Net (loss) income $ (41,202) $ 21,003 $ (219) $ 43,079
============= ============ ========== ==========
Net (loss) income allocated to the
Limited Partners $ (40,790) $ 20,793 $ (217) $ 42,648
============= ============ ========== ==========
Net (loss) income per Limited
Partnership Unit $ (0.07) $ 0.04 $ ( 0.00) $ 0.08
============= ============ ========== ==========
Weighted average number of Limited
Partnership Units 554,622 565,736 555,362 568,300
============= ============ ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
4
<PAGE>
<TABLE>
NTS-PROPERTIES VII, LTD.
------------------------
STATEMENTS OF CASH FLOWS
------------------------
(UNAUDITED)
-----------
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------------
2000 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
<S> <C> <C>
Net (loss) income $ (219) $ 43,079
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on disposal of assets 54,608 -
Gain on sale of assets (4,118) -
Depreciation and amortization 343,645 357,830
Changes in assets and liabilities:
Cash and equivalents - restricted (2,115) 44,898
Accounts receivable 4,876 (12,269)
Other assets (30,234) 8,656
Accounts payable (1,066) 17,356
Security deposits 375 2,398
Other liabilities 89,159 49,835
---------------- ----------------
Net cash provided by operating activities 454,911 511,783
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Proceeds from sale of assets 6,934 -
Additions to land, buildings and amenities (171,251) (73,745)
---------------- ----------------
Net cash used in investing activities (164,317) (73,745)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Cash and equivalents - restricted - (60,000)
Principal payment on mortgages payable (187,267) (173,543)
Cash distributions (56,135) (86,222)
Repurchase of Limited Partnership Units (15,000) (60,000)
---------------- ----------------
Net cash used in financing activities (258,402) (379,765)
---------------- ----------------
Net increase in cash and equivalents 32,192 58,273
CASH AND EQUIVALENTS, beginning of period 400,262 398,001
---------------- ----------------
CASH AND EQUIVALENTS, end of period $ 432,454 $ 456,274
================ ================
Interest paid on a cash basis $ 272,124 $ 286,203
================ ================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
5
<PAGE>
NTS-PROPERTIES VII, LTD.
------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
The unaudited financial statements included herein should be read in conjunction
with the Partnership's 1999 Form 10-K as filed with the Securities and Exchange
Commission on March 29, 2000. 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
nine months ended September 30, 2000 and 1999.
1. Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles ("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.
2. Concentration of Credit Risk
----------------------------
NTS-Properties VII, Ltd. owns and operates, through a joint venture, a
commercial rental property in Louisville, Kentucky. A single tenant
occupies this commercial property. The Partnership also owns and operates
residential rental properties in Louisville and Lexington, Kentucky.
It is the Partnership's understanding that SHPS, Inc. does not intend to
continue to occupy the space at Blankenbaker Business Center 1A through the
duration of its lease, ending in July 2005. The Partnership's proportionate
share of the rental income from this property accounted for approximately
14% of the Partnership's total revenues for the nine months ended September
30, 2000. The Partnership has not yet determined the effect, if any, on the
Partnership's operations, given the fact SHPS, Inc. is under lease until
July 2005 and no official notice of termination has been received.
3. Reclassifications of 1999 Financial Statements
----------------------------------------------
Certain reclassifications have been made to the September 30, 1999
financial statements to conform with the September 30, 2000
classifications. These reclassifications have no effect on previously
reported operations.
4. Cash and Equivalents - Restricted
---------------------------------
Cash and equivalents - restricted represents funds received for residential
security deposits, funds which have been escrowed with mortgage companies
for property taxes in accordance with the loan agreements, and funds
reserved by the Partnership for the purchase of Limited Partnership Units
through tender offers (See Notes to Financial Statements - Note 7).
6
<PAGE>
5. Basis of Property and Depreciation
----------------------------------
Land, buildings and amenities are stated at historical cost, less
accumulated depreciation, to the Partnership. 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, 5-30 years for
amenities and the applicable lease term for tenant improvements.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," 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 by management
during the periods ended September 30, 2000 and 1999 did not result in any
impairment loss.
6. Mortgages Payable
-----------------
Mortgages payable consist of the following:
<TABLE>
September 30, 2000 December 31, 1999
---------------------------- --------------------------
<S> <C> <C>
Mortgage payable to an insurance company, bearing
interest at a fixed rate of 7.37%, due October 15,
2012, secured by land and buildings. $ 3,787,716 $ 3,876,398
Mortgage payable to an insurance company, bearing
interest at a fixed rate of 8.5%, due November 15,
2005, secured by land and buildings. 879,372 977,957
-------------------------- ------------------------
$ 4,667,088 $ 4,854,355
========================== ========================
</TABLE>
Based on the borrowing rates currently available to the Partnership for
mortgages with similar terms and average maturities, the fair value of
long-term debt is approximately $4,522,000.
7. Tender Offer
------------
On March 24, 2000, the Partnership and ORIG, LLC, an affiliate of the
Partnership (the "Offerors"), filed a tender offer (the "Third Tender
Offer") with the Securities and Exchange Commission, commencing on March
27, 2000, to purchase 5,000 of the Partnership's Limited Partnership Units
at a price of $6.00 per Unit. The Third Tender Offer stated that the
Partnership would purchase the first 2,500 Units tendered and would fund
its purchases and its portion of the expenses from cash reserves. If more
than 2,500 Units were tendered ORIG, LLC would purchase up to an additional
2,500 Units. If more than 5,000 Units were tendered, the Offerors had the
option to acquire the additional Units on a pro rata basis. The Third
Tender Offer was scheduled to expire on June 27, 2000.
7
<PAGE>
7. Tender Offer - Continued
------------------------
On June 23, 2000, the Partnership and ORIG, LLC filed an amendment to the
Third Tender Offer which extended the expiration date of the Third Tender
Offer to August 15, 2000.
On August 15, 2000 the Third Tender Offer expired. A total of 39,220 Units
were tendered and the Offerors accepted all Units tendered. The Partnership
repurchased 2,500 Units at a cost of $15,000 and ORIG, LLC purchased 36,720
Units at a cost of $220,320. The expenses associated with the Third Tender
Offer were approximately $19,040 of which the Partnership incurred $1,257
and ORIG incurred $17,783. Units acquired by the Partnership will be
retired. Units acquired by ORIG, LLC will be held by it. The General
Partner, NTS-Properties Associates VII, did not participate in the Third
Tender Offer.
8. Related Party Transactions
--------------------------
Pursuant to an agreement with the Partnership, NTS Development Company, an
affiliate of the General Partner of the Partnership, receives property
management fees on a monthly basis. The fees are paid in an amount equal to
5% of the gross revenues from the residential properties and 6% of the
gross revenues from the commercial property. Also pursuant to an agreement,
NTS Development Company receives a repair and maintenance fee equal to 5.9%
of costs incurred which relate to capital improvements. These repair and
maintenance fees are capitalized as part of land, buildings and amenities.
The Partnership was charged the following amounts from NTS Development
Company for the nine months ended September 30, 2000 and 1999. 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.
<TABLE>
Nine Months Ended
September 30,
-------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Property management fees $ 76,268 $ 76,514
---------------- ----------------
Total property management fees 76,268 76,514
---------------- ----------------
Property management 111,250 106,202
Leasing 18,952 30,049
Administrative - operating 55,111 61,161
Other 1,101 225
---------------- ----------------
Total operating expenses -affiliated 186,414 197,637
---------------- ----------------
Administrative - professional 63,667 53,549
---------------- ----------------
Total professional and administrative expenses - affiliated 63,667 53,549
---------------- ----------------
Repairs and maintenance fee 7,774 4,295
Construction management 116 -
---------------- ----------------
Total related party transactions capitalized 7,890 4,295
---------------- ----------------
Total related party transactions $ 334,239 $ 331,995
================ ================
</TABLE>
8
<PAGE>
8. Related Party Transactions - Continued
--------------------------------------
On February 7, 2000, ORIG, LLC (the "Affiliate") purchased Interests in the
Partnership and pursuant to an Agreement, Bill of Sale and Assignment by
and among the Affiliate and four investors in the Partnership (the
"Purchase Agreement"). The Affiliate purchased 2,251 Interests in the
Partnership for a total consideration of $15,082 or an average price of
$6.70 per Interest. The Affiliate paid these investors a premium above the
purchase price previously offered for Interests pursuant to prior tender
offers because this purchase allowed the Affiliate to purchase substantial
numbers of Interests without incurring the significant expenses involved
with a tender offer and multiple transfers.
9. Commitments and Contingencies
-----------------------------
The Partnership, as an owner of real estate, is subject to various
environmental laws of the federal and local governments. Compliance by the
Partnership with existing laws has not had a material adverse effect on the
Partnership's financial condition and results of operations. However, the
Partnership cannot predict the impact of new or changed laws or regulations
on its current properties or on properties that it may acquire in the
future.
The Partnership does not believe there is any litigation threatened against
the Partnership 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 adverse effect on the
consolidated financial statements of the Partnership.
The Partnership plans to replace the roofs at Park Place Apartments Phase
II (17 buildings) all of which were installed using shingles produced by a
single manufacturer. The shingles appear to contain defects which may cause
them to fail before the end of their expected useful life. As the
manufacturer has declared bankruptcy, the Partnership does not expect to be
able to recover any of the costs of the roof replacements. The Partnership
does not have sufficient working capital to make all of the roof
replacements at once and intends to make the replacements over the next 36
months. The total costs of replacing all of the roofs is estimated to be
$340,000 ($20,000 per building). As of September 30, 2000, no roof
replacements have been started.
10. Segment Reporting
-----------------
The Partnership's reportable operating segments include residential and
commercial real estate operations. The residential operations represent the
Partnership's ownership and operating results relative to apartment
communities known as The Park at the Willows and Park Place Apartments
Phase II. The commercial operations represent the Partnership's ownership
and operating results relative to suburban commercial office space known as
Blankenbaker Business Center 1A.
9
<PAGE>
10. Segment Reporting - Continued
-----------------------------
The financial information of the operating segments has been prepared using
a management approach, which is consistent with the basis and manner in
which the Partnership's management internally reports financial information
for the purposes of assisting in making operating decisions. The
Partnership's management evaluated performance based on stand-alone
operating segment net income.
<TABLE>
Three Months Ended September 30, 2000
-------------------------------------------------------
Residential Commercial Total
--------------- ---------------- -----------------
<S> <C> <C> <C>
Rental income $ 417,577 $ 71,891 $ 489,468
Interest and other income 4,257 48 4,305
------------ ------------ -----------
Total net revenues $ 421,834 $ 71,939 $ 493,773
------------ ------------ -----------
Operating expenses and operating expenses -
affiliated $ 200,271 $ 10,259 $ 210,530
Loss on disposal of assets 34,690 - 34,690
Interest expense 70,474 19,050 89,524
Management fees 21,910 4,438 26,348
Real estate taxes 21,925 7,929 29,854
Depreciation and amortization 88,728 22,889 111,617
------------ ------------ -----------
Total expenses $ 437,998 $ 64,565 $ 502,563
------------ ------------ -----------
Net (loss) income $ (16,164) $ 7,374 $ (8,790)
============ ============ ===========
</TABLE>
<TABLE>
Three Months Ended September 30, 1999
--------------------------------------------------------
Residential Commercial Total
--------------- ----------------- ----------------
<S> <C> <C> <C>
Rental income $ 443,241 $ 71,651 $ 514,892
Interest and other income 1,069 - 1,069
------------ ------------ -----------
Total net revenues $ 444,310 $ 71,651 $ 515,961
------------ ------------ -----------
Operating expenses and operating expenses -
affiliated $ 173,157 $ 10,541 $ 183,698
Interest expense - 21,896 21,896
Management fees 23,525 4,203 27,728
Real estate taxes 22,710 4,426 27,136
Depreciation and amortization 89,385 22,902 112,287
------------ ------------ -----------
Total expenses $ 308,777 $ 63,968 $ 372,745
------------ ------------ -----------
Net income $ 135,533 $ 7,683 $ 143,216
============ ============ ===========
</TABLE>
10
<PAGE>
10. Segment Reporting - Continued
------------------------------
<TABLE>
Nine Months Ended September 30, 2000
-------------------------------------------------------
Residential Commercial Total
--------------- ---------------- -----------------
<S> <C> <C> <C>
Rental income $ 1,219,186 $ 212,555 $ 1,431,741
Interest and other income 7,132 98 7,230
Gain on sale of assets 4,118 - 4,118
----------- ----------- ----------
Total net revenues $ 1,230,436 $ 212,653 $ 1,443,089
----------- ----------- ----------
Operating expenses and operating expenses -
affiliated $ 474,362 $ 26,639 $ 501,001
Loss on disposal of assets 54,532 76 54,608
Interest expense 211,470 59,254 270,724
Management fees 63,630 12,638 76,268
Real estate taxes 67,580 16,859 84,439
Depreciation and amortization 263,648 68,676 332,324
----------- ----------- ----------
Total expenses $ 1,135,222 $ 184,142 $ 1,319,364
----------- ----------- ----------
Net income $ 95,214 $ 28,511 $ 123,725
=========== =========== ==========
</TABLE>
<TABLE>
Nine Months Ended September 30, 1999
-------------------------------------------------------
Residential Commercial Total
--------------- ---------------- -----------------
<S> <C> <C> <C>
Rental income $ 1,239,560 $ 220,779 $ 1,460,339
Interest and other income 7,068 7 7,075
----------- ----------- ----------
Total net revenues $ 1,246,628 $ 220,786 $ 1,467,414
----------- ----------- ----------
Operating expenses and operating expenses -
affiliated $ 467,653 $ 31,750 $ 499,403
Interest expense - 67,612 67,612
Management fees 63,596 12,918 76,514
Real estate taxes 68,130 13,277 81,407
Depreciation and amortization 279,379 68,707 348,086
----------- ----------- -----------
Total expenses $ 878,758 $ 194,264 $ 1,073,022
----------- ----------- -----------
Net income $ 367,870 $ 26,522 $ 394,392
=========== =========== ===========
</TABLE>
11
<PAGE>
10. Segment Reporting - Continued
------------------------------
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements for the
three months and nine months ended September 30, 2000 and 1999 is necessary
given amounts recorded at the Partnership level and not allocated to the
operating properties for internal reporting purposes.
<TABLE>
Three Months Ended September 30,
-----------------------------------------
2000 1999
------------------ ------------------
NET REVENUES
------------
<S> <C> <C>
Total revenues for reportable segments $ 493,773 $ 515,961
Other income for Partnership 6,698 3,436
----------------- -----------------
Total consolidated net revenues $ 500,471 $ 519,397
================= =================
INTEREST EXPENSE
----------------
Interest expense for reportable segments $ 89,524 $ 21,896
Interest expense for Partnership - 72,879
----------------- -----------------
Total interest expense $ 89,524 $ 94,775
================= =================
DEPRECIATION AND AMORTIZATION
-----------------------------
Total depreciation and amortization for reportable segments $ 111,617 $ 112,287
Depreciation and amortization for Partnership 7,633 7,624
Eliminations (3,929) (3,922)
----------------- -----------------
Total depreciation and amortization $ 115,321 $ 115,989
================= =================
NET INCOME (LOSS)
----------------
Total net (loss) income for reportable segments $ (8,790) $ 143,216
Net loss for Partnership (28,967) (118,453)
Eliminations (3,445) (3,760)
----------------- -----------------
Total net (loss) income $ (41,202) $ 21,003
================= =================
</TABLE>
12
<PAGE>
10. Segment Reporting - Continued
------------------------------
<TABLE>
Nine Months Ended September 30,
-------------------------------------------
2000 1999
-------------------- -------------------
NET REVENUES
------------
<S> <C> <C>
Total revenues for reportable segments $ 1,443,089 $ 1,467,414
Other income for Partnership 17,590 10,527
------------------- -----------------
Total consolidated net revenues $ 1,460,679 $ 1,477,941
=================== =================
INTEREST EXPENSE
----------------
Interest expense for reportable segments $ 270,724 $ 67,612
Interest expense for Partnership - 218,591
------------------- -----------------
Total interest expense $ 270,724 $ 286,203
=================== =================
DEPRECIATION AND AMORTIZATION
-----------------------------
Total depreciation and amortization for reportable segments $ 332,324 $ 348,086
Depreciation and amortization for Partnership 23,087 21,508
Eliminations (11,766) (11,764)
------------------- -----------------
Total depreciation and amortization $ 343,645 $ 357,830
=================== =================
NET INCOME (LOSS)
----------------
Total net income for reportable segments $ 123,725 $ 394,392
Net loss for Partnership (107,199) (336,554)
Eliminations (16,745) (14,759)
------------------- -----------------
Total net (loss) income $ (219) $ 43,079
=================== =================
</TABLE>
11. Recent Accounting Pronouncement
-------------------------------
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") has reached a consensus on Issue No. 00-1,
"Applicability of the Pro Rata Method of Consolidation to Investments in
Certain Partnerships and Other Unincorporated Joint Ventures." The EITF
reached a consensus that a proportionate gross financial statement
presentation (referred to as "proportionate consolidation" in the
Partnership's 1999 Form 10-K Notes to Financial Statements) is not
appropriate for an investment in an unincorporated legal entity accounted
for by the equity method of accounting, unless the investee is in either
the construction industry or an extractive industry where there is a
longstanding practice of its use.
The consensus is applicable to financial statements for annual periods
ending after June 15, 2000. Upon application of the consensus, all
comparative financial statements shall be restated to conform with the
consensus. The application of this consensus will not result in a
restatement of previously reported partners' equity or results of
operations, but will result in a recharacterization or reclassification of
certain financial statements' captions and amounts. The Partnership plans
to restate its financial statements using the equity method to account for
its joint venture investments for the year ending December 31, 2000.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is structured in four major sections. The first section
provides information related to occupancy levels and rental and other income
generated by the Partnership's properties. The second analyzes results of
operations on a consolidated basis. The final sections address consolidated cash
flows and financial condition. A discussion of certain market risks also
follows. MD&A should be read in conjunction with the Financial Statements in
Item 1 and the Cautionary Statements below.
Cautionary Statements
---------------------
Some of the statements included in this Item 2 may be considered to be
"forward-looking statements" since such statements relate to matters which have
not yet occurred. For example, phrases such as "the Partnership anticipates,"
"believes" or "expects," indicate that it is possible that the event
anticipated, believed or expected may not occur. Should such event not occur,
then the result which the Partnership expected also may not occur or occur in a
different manner, which may be more or less favorable to the Partnership. The
Partnership does not undertake any obligations to publicly release the result of
any revision 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 judgement, 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 the Partnership pursuant to the safe harbor established by recent
securities legislation should be evaluated in the context of these factors.
The Partnership's liquidity, capital resources and results of operations are
subject to a number of risks and uncertainties including, but not limited to the
following: the ability of the Partnership to achieve planned revenues; the
ability of the Partnership to make payments due under its debt agreements; the
ability of the Partnership to negotiate and maintain terms with vendors and
service providers for operating expenses; competitive pressures from other real
estate companies, including large commercial and residential real estate
companies, which may affect the nature and viability of the Partnership's
business strategy; trends in the economy as a whole which may affect consumer
confidence and demand for the types of rental property held by the Partnership;
the ability of the Partnership to predict the demand for specific rental
properties; the ability of the Partnership to attract and retain tenants;
availability and costs of management and labor employed; real estate occupancy
and development costs, including the substantial fixed investment costs
associated with renovations necessary to obtain new tenants and retain existing
tenants; and the risk of a major commercial tenant defaulting on its lease due
to risks generally associated with real estate, many of which are beyond the
control of the Partnership, including general or local economic conditions,
competition, interest rates, real estate tax rates, other operating expenses and
acts of God.
14
<PAGE>
Results of Operations
---------------------
The occupancy levels at the Partnership's properties as of September 30 were as
follows:
<TABLE>
Nine Months Ended September 30,
-----------------------------------------------
2000 1999
------------------- -------------------
Wholly-owned Properties
-----------------------
<S> <C> <C>
The Park at the Willows 92% 90%
Park Place Apartments Phase II (1) 83% 92%
Property Owned in Joint Venture with NTS-Properties IV and
----------------------------------------------------------
NTS-Properties Plus, Ltd. (Ownership % at September 30, 2000)
-------------------------------------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100%
</TABLE>
(1) In the opinion of the General Partner of the Partnership, the decrease in
occupancy is only a temporary fluctuation and does not represent a
permanent downward occupancy trend.
The average occupancy levels at the Partnership's properties during the three
months and nine months ended September 30 were as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
Wholly-owned Properties
-----------------------
<S> <C> <C> <C> <C>
The Park at the Willows (1) 86% 89% 77% 91%
Park Place Apartments Phase II (1) 85% 91% 85% 86%
Property Owned in Joint Venture with NTS-Properties IV and
----------------------------------------------------------
NTS-Properties Plus, Ltd. (Ownership % at September 30,
-------------------------------------------------------
2000)
-----
Blankenbaker Business Center 1A (31.34%) 100% 100% 100% 100%
</TABLE>
(1) In the opinion of the General Partner of the Partnership, the decrease in
average occupancy is only a temporary fluctuation and does not represent a
permanent downward occupancy trend.
Rental and other income generated by the Partnership's properties for the three
months and nine months ended September 30 were as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- ------------ ------------ ------------
Wholly-owned Properties
-----------------------
<S> <C> <C> <C> <C>
The Park at the Willows $ 76,514 $ 83,292 $ 222,837 $ 256,704
Park Place Apartments Phase II $ 345,320 $ 361,019 $ 1,007,598 $ 989,924
Property Owned in Joint Venture with NTS-Properties IV
and NTS-Properties Plus, Ltd. (Ownership % at
September 30, 2000)
Blankenbaker Business Center 1A (31.34%) (1) $ 71,939 $ 71,651 $ 212,653 $ 220,786
</TABLE>
(1) Revenues shown in this table represent the Partnership's share of revenues
generated by Blankenbaker Business Center 1A. The Partnership's percentage
interest in the Joint Venture was 31.34% during the three months and nine
months ended September 30, 2000 and 1999.
15
<PAGE>
Results of Operations - Continued
---------------------------------
Current occupancy levels are considered adequate to continue the operation of
the Partnership's properties without the need of any additional financing. See
the Consolidated Cash Flows and Financial Condition section of Item 2 for a
discussion regarding the cash requirements of the Partnership's current debt
financings.
It is the Partnership's understanding that SHPS, Inc. does not intend to
continue to occupy the space at Blankenbaker Business Center 1A through the
duration of its lease, ending in July 2005. The Partnership's proportionate
share of the rental income from this property accounted for approximately 14% of
the Partnership's total revenues for the nine months ended September 30, 2000.
The Partnership has not yet determined the effect, if any, on the Partnership's
operations, given the fact SHPS, Inc. is under lease until July 2005 and no
official notice of termination has been received.
The following is an analysis of material changes in the results of operations
for the periods ending September 30, 2000 and 1999. Items that did not have a
material impact on operations for the periods listed above have been excluded
from this discussion.
Other income increased approximately $6,500 or 144% and $7,200 or 41% for the
three months and nine months ended September 30, 2000, respectively, as compared
to the same periods in 1999, mainly as a result of increased interest earned on
bank accounts.
Operating expenses increased approximately $27,800 or 24% for the three months
ended September 30, 2000, as compared to the same period in 1999, mainly as a
result of increased repair and maintenance costs at Park Place Apartments Phase
II, which consisted of increased wood replacement partially offset by decreased
roof repairs and floor covering. The increase is also a result of increased
landscaping costs at Park Place Apartments Phase II and Blankenbaker Business
Center 1A and increased pool maintenance at The Park at the Willows. The
increase is partially offset by decreased cable expense at Park Place Apartments
Phase II (starting in the year 2000 residents are responsible for their own
cable) and decreased landscaping at The Park at the Willows.
Operating expenses - affiliated decreased approximately $11,200 or 6% for the
nine months ended September 30, 2000, as compared to the same period in 1999, as
a result of decreased personnel costs at Park Place Apartments Phase II due to a
portion of these costs being allocated to Park Place Apartments Phase III, which
was not in full operation as of September 30, 1999. The decrease is also a
result of decreased overhead costs allocated at Blankenbaker Business Center 1A
due to personnel status changes. Operating expenses - affiliated are expenses
incurred for services performed by employees of NTS Development Company, an
affiliate of the General Partner.
The loss on disposal of assets of approximately $54,608 for the nine months
ended September 30, 2000, is the result of the retirement of assets that were
not fully depreciated. The retirements were the result of a clubhouse renovation
project at Park Place Apartments Phase II and exterior renovations at The Park
at The Willows. The loss on disposal of assets of approximately $34,690 for the
three months ended September 30, 2000, is a result of the clubhouse renovation
project at Park Place Apartments Phase II.
16
<PAGE>
Results of Operations - Continued
---------------------------------
Interest expense decreased approximately $5,300 or 6% and $15,500 or 5 % for the
three months and nine months ended September 30, 2000, respectively, as compared
to the same periods in 1999. This decrease is due to principal payments made on
mortgages payable.
Professional and administrative expenses decreased approximately $17,500 or 56%
and $13,400 or 17% for the three months and nine months ended September 30,
2000, respectively, as compared to the same periods in 1999. This decrease is
due primarily to decreased legal fees related to tender offers, outside
accounting fees and printing expense related to tender offers.
Professional and administrative expenses - affiliated increased approximately
$3,800 or 22% and $10,100 or 19% for the three months and nine months ended
September 30, 2000, respectively, as compared to the same periods in 1999,
primarily as a result of increased finance and accounting salary costs.
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 expense decreased approximately $14,200 or 4% for
the nine months ended September 30, 2000, as compared to the same period in
1999, as a result of assets with shorter lives at the Partnership's residential
properties having become fully depreciated. The decrease is also a result of the
sale of clubhouse furniture, of which some was not fully depreciated, at Park
Place Apartments Phase II. The decrease is partially offset by the addition of
clubhouse renovation costs, fitness center renovation costs, landscaping costs,
and the cost of a traffic light at Park Place Apartments Phase II, and exterior
renovation costs at The Park at the Willows.
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, 5-30 years for amenities and the
applicable lease term for tenant improvements. The aggregate cost of the
Partnership's properties for Federal tax purposes is approximately $13,920,000.
Consolidated Cash Flows and Financial Condition
-----------------------------------------------
Cash flows provided by (used in):
<TABLE>
Nine Months Ended September 30,
------------------------------------------------
2000 1999
--------------------- --------------------
<S> <C> <C>
Operating activities $ 454,911 $ 511,783
Investing activities (164,317) (73,745)
Financing activities (258,402) (379,765)
--------------------- -------------------
Net increase in cash and equivalents $ 32,192 $ 58,273
===================== ===================
</TABLE>
Net cash provided by operating activities decreased approximately $56,900 or 11%
for the nine months ended September 30, 2000, as compared to the same period in
1999. The decrease in net cash provided by operating activities was driven
primarily by decreased net income, increased prepaid expenses and decreased
accounts payable in 2000. The decrease is partially offset by increased property
tax payable, which is included in other liabilities, and increased collection of
accounts receivable.
17
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
The increase in net cash used in investing activities for the nine months ended
September 30, 2000, as compared to the same period in 1999, was mainly the
result of increased capital expenditures for the clubhouse, fitness center and
exterior renovation projects at Park Place Apartments Phase II and studio
renovations at The Park at the Willows.
The decrease in net cash used in financing activities for the nine months ended
September 30, 2000, as compared to the same period in 1999, was mainly a result
of 1) a decrease in cash restricted for the repurchase of Limited Partnership
Units, 2) a decrease in distributions paid (3rd Quarter 2000 distributions
declared were not paid until October 2000), and 3) a decrease in the number of
Limited Partnership Units repurchased. The decrease is partially offset by
increased principal payments made on mortgages payable.
During the nine months ended September 30, 2000 and 1999, the Partnership used
cash flow from operations and cash on hand to declare a 1% (annualized) cash
distribution of $84,076 (2000) and $85,718 (1999), respectively. The annualized
distribution rate is calculated as a percent of the original capital
contribution. The Limited Partners received 99% and the General Partner received
1% of these distributions. The primary source of future liquidity and
distributions is expected to be derived from cash generated by the Partnership's
properties after adequate cash reserves are established for future leasing,
renovations and tenant finish costs. It is anticipated that the cash flows from
operations and cash reserves will be sufficient to meet the needs of the
Partnership. Cash reserves (which are unrestricted cash and equivalents as shown
on the Partnership's balance sheet) were $432,454 at September 30, 2000.
The table below presents that portion of the distributions that represent a
return of capital on a GAAP basis for the nine months ended September 30, 2000
and 1999.
<TABLE>
Net Income Cash Distributions Return of
Allocated Declared Capital
--------------------- ---------------------- ----------------------
Limited Partners:
<S> <C> <C> <C>
2000 $ (217) $ 83,235 $ 83,235
1999 $ 42,648 $ 84,861 $ 42,213
General Partner:
2000 $ (2) $ 841 $ 841
1999 $ 431 $ 857 $ 426
</TABLE>
The demand on future liquidity is anticipated to increase as a result of the
replacement of the roofs at Park Place Apartments Phase II (17 buildings) all of
which were installed using shingles produced by a single manufacturer. The
shingles appear to contain defects which may cause them to fail before the end
of their expected useful life. As the manufacturer has declared bankruptcy, the
Partnership does not expect to be able to recover any of the costs of the roof
replacements. The Partnership does not have sufficient working capital to make
all of the roof replacements at once and intends to make the replacements over
the next 36 months. The total costs of replacing all of the roofs is estimated
to be $340,000 ($20,000 per building). As of September 30, 2000, no roof
replacements have been started.
18
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
On March 24, 2000, the Partnership and ORIG, LLC, an affiliate of the
Partnership (the "Offerors"), filed a tender offer (the "Third Tender Offer")
with the Securities and Exchange Commission, commencing on March 27, 2000, to
purchase 5,000 of the Partnership's Limited Partnership Units at a price of
$6.00 per Unit. The Third Tender Offer stated that the Partnership would
purchase the first 2,500 Units tendered and would fund its purchase and its
portion of the expenses from cash reserves. If more than 2,500 Units were
tendered, ORIG, LLC would purchase up to an additional 2,500 Units. If more than
5,000 Units were tendered, the Offerors had the option to acquire the additional
Units on a pro rata basis. The Third Tender Offer was scheduled to expire on
June 27, 2000.
On June 23, 2000, the Partnership and ORIG, LLC filed an amendment to the Third
Tender Offer which extended the expiration date of the Third Tender Offer to
August 15, 2000.
On August 15, 2000 the Third Tender Offer expired. A total of 39,220 Units were
tendered and the Offerors accepted all Units tendered. The Partnership
repurchased 2,500 Units at a costs of $15,000 and ORIG, LLC purchased 36,720
Units at a cost of $220,320. The expenses associated with the Third Tender Offer
were approximately $19,040 of which the Partnership incurred $1,257 and ORIG
incurred $17,783. Units acquired by the Partnership will be retired. Units
acquired by ORIG, LLC will be held by it. The General Partner, NTS-Properties
Associates VII, did not participate in the Third Tender Offer.
In an effort to continue to improve occupancy levels at the Partnership's
residential properties, the Partnership has an on-site leasing staff, who are
employees of NTS Development Company, at each of the apartment communities. The
staff handles all on-site visits from potential tenants, coordinates local
advertising with NTS Development Company's marketing staff, makes visits to
local companies to promote fully furnished apartments and works with current
residents on lease renewals.
The lease at Blankenbaker Business Center 1A provides for the tenant to
contribute toward the payment of common area expenses, insurance and real estate
taxes. This lease provision, along with the fact that residential leases are
generally for a period of one year, should protect the Partnership's operations
from the impact of inflation and changing prices.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Our primary risk exposure with regard to financial instruments is changes in
interest rates. All of the Partnership's debt bears interest at a fixed rate. At
September 30, 2000, a hypothetical 100 basis point increase in interest rates
would result in an approximate $234,000 decrease in the fair value of debt.
20
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
Exhibit 27. Financial Data Schedule
b) Reports on Form 8-K:
Not applicable.
21
<PAGE>
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.
-----------------------------------------------
(Registrant)
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 13, 2000
22
<PAGE>
