<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer
incorporation 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 June 30, 2000 and December 31, 1999 3
Statement of Partners' Equity as of June 30, 2000 3
Statements of Operations for the three months and six months ended
June 30, 2000 and 1999 4
Statements of Cash Flows for the six months ended
June 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
June 30, December 31,
2000 1999*
---- -----
(Unaudited)
ASSETS
------
<S> <C> <C>
Cash and equivalents $ 385,910 $ 400,262
Cash and equivalents - restricted 50,924 40,080
Accounts receivable 5,255 21,771
Land, buildings and amenities, net 9,561,589 9,688,537
Other assets 117,385 116,993
----------- -----------
TOTAL ASSETS $10,121,063 $10,267,643
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Mortgages payable $ 4,730,516 $ 4,854,355
Accounts payable 36,264 97,355
Security deposits 26,650 26,475
Other liabilities 77,974 24,646
----------- -----------
TOTAL LIABILITIES 4,871,404 5,002,831
COMMITMENTS AND CONTINGENCIES (Note 9)
PARTNERS' EQUITY 5,249,659 5,264,812
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $10,121,063 $10,267,643
=========== ===========
</TABLE>
<TABLE>
STATEMENT OF PARTNERS' EQUITY
-----------------------------
<CAPTION>
Limited General
Partners 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 income - current year 40,572 410 40,982
Cash distributions declared to date (2,689,385) (27,165) (2,716,550)
Repurchase of Limited Partnership Units (415,080) -- (415,080)
------------- ------------- -------------
BALANCES AT JUNE 30, 2000 $ 5,302,268 $ (52,609) $ 5,249,659
============= ============= =============
</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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
--------
<S> <C> <C> <C> <C>
Rental income $492,652 $491,470 $942,272 $946,001
Interest and other income 6,260 10,242 13,818 12,543
Gain on sale of assets -- -- 4,118 --
-------- -------- -------- --------
TOTAL REVENUES 498,912 501,712 960,208 958,544
-------- -------- -------- --------
EXPENSES
--------
Operating expenses 86,837 100,069 168,748 183,751
Operating expenses - affiliated 65,839 65,018 121,719 131,953
Loss on disposal of assets 76 -- 19,919 --
Interest expense 90,237 95,933 181,200 191,427
Management fees 25,895 25,803 49,920 48,786
Real estate taxes 27,293 27,136 54,586 54,272
Professional and administrative
expenses 21,801 27,124 52,565 48,502
Professional and administrative
expenses - affiliated 22,653 15,886 42,244 35,935
Depreciation and amortization 114,443 120,732 228,325 241,841
-------- -------- -------- --------
TOTAL EXPENSES 455,074 477,701 919,226 936,467
-------- -------- -------- --------
Net income $ 43,838 $ 24,011 $ 40,982 $ 22,077
======== ======== ======== ========
Net income allocated to the Limited Partners $ 43,400 $ 23,771 $ 40,572 $ 21,856
======== ======== ======== ========
Net income per Limited Partnership Unit $ 0.08 $ 0.04 $ 0.07 $ 0.04
======== ======== ======== ========
Weighted average number of Limited
Partnership Units 555,736 565,736 555,736 569,603
======== ======== ======== ========
</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>
Six Months Ended
June 30,
--------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
<S> <C> <C>
Net income $ 40,982 $ 22,077
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on disposal of assets 19,919 --
Gain on sale of assets (4,118) --
Depreciation and amortization 228,325 241,841
Changes in assets and liabilities:
Cash and equivalents - restricted 4,156 (10,078)
Accounts receivable 16,516 (20,852)
Other assets (3,305) (6,415)
Accounts payable (61,091) (9,247)
Security deposits 175 1,323
Other liabilities 53,328 23,643
---------- ----------
Net cash provided by operating activities 294,887 242,292
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Proceeds from sale of assets 6,934 --
Additions to land, buildings and amenities (121,199) (37,048)
---------- ----------
Net cash used in investing activities (114,265) (37,048)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Cash and equivalents - restricted (15,000) 60,000
Principal payment on mortgages payable (123,839) (115,182)
Cash distributions (56,135) (57,650)
Repurchase of Limited Partnership Units -- (60,000)
---------- ----------
Net cash used in financing activities (194,974) (172,832)
---------- ----------
Net (decrease) increase in cash and equivalents (14,352) 32,412
CASH AND EQUIVALENTS, beginning of period 400,262 398,001
---------- ----------
CASH AND EQUIVALENTS, end of period $ 385,910 $ 430,413
========== ==========
Interest paid on a cash basis $ 182,423 $ 191,428
========== ==========
</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 six
months ended June 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.
3. Reclassifications of 1999 Financial Statements
----------------------------------------------
Certain reclassifications have been made to the June 30, 1999 financial
statements to conform with the June 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 Note 7).
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.
6
<PAGE>
5. Basis of Property and Depreciation - Continued
----------------------------------------------
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 during the
periods ended June 30, 2000 and 1999 did not result in any impairment loss.
6. Mortgages Payable
-----------------
Mortgages payable consist of the following:
June 30, December 31,
2000 1999
---- ----
Mortgage payable to an insurance company,
bearing interest at a fixed rate of 7.37%,
due October 15, 2012, secured by land
and buildings. $ 3,817,584 $ 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. 912,932 977,957
----------- -----------
$ 4,730,516 $ 4,854,355
=========== ===========
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 $4,583,000.
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 as of the date of the Third Tender Offer.
Approximately $48,000 ($30,000 to purchase 5,000 Units plus approximately
$18,000 for expenses associated with the Third Tender Offer) is required to
purchase all 5,000 Units. The Third Tender Offer stated that the
Partnership will purchase the first 2,500 Units tendered and will fund its
purchases and its portion of the expenses from cash reserves. If more than
2,500 Units are tendered ORIG, LLC. will purchase up to an additional 2,500
Units. If more than 5,000 Units are tendered, the Offerors may choose to
acquire the additional Units on a pro rata basis. Units that are acquired
by the Partnership will be retired. Units that are acquired by ORIG, LCC.
will be held by it. The General Partner, NTS-Properties Associates VII,
does not intend to participate in the Third Tender Offer. 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, with the Securities and Exchange Commission. This
amendment supplements and amends the Third Tender Offer to extend the
expiration date of the Third Tender Offer to August 15, 2000, and to expand
the definition of Offerors to include Mr. J.D. Nichols and Mr. Brian F.
Lavin, each an affiliate of the issuer. As of the date of this filing,
32,873 Units have been tendered.
8. Related Party Transactions
--------------------------
Property management fees of $49,920 and $48,786 for the six months ended
June 30, 2000 and 1999, respectively, were paid to NTS Development Company,
an affiliate of the General Partner. The fee is paid monthly in an amount
equal to 5% of the gross revenues from the residential properties and 6% of
the gross revenues from the commercial property pursuant to an agreement
with the Partnership. Also pursuant to an agreement, NTS Development
Company will receive a repair and maintenance fee equal to 5.9% of costs
incurred which relate to capital improvements.
The Partnership has incurred $5,779 and $2,451 for the six months ended
June 30, 2000 and 1999, respectively, as repair and maintenance fees, and
has capitalized these costs as part of land, buildings and amenities. The
Partnership was also charged the following amounts from NTS Development
Company for the six months ended June 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.
Six Months Ended
June 30,
--------
2000 1999
---- ----
Leasing $ 11,911 $ 21,221
Administrative 77,517 77,505
Property Management 73,969 67,536
Other 682 4,076
--------- ---------
$ 164,079 $ 170,338
========= =========
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.
8
<PAGE>
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 June 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 June 30, 2000
--------------------------------
Residential Commercial Total
----------- ---------- -----
<CAPTION>
<S> <C> <C> <C>
Rental income $414,695 $ 77,957 $492,652
Interest and other income 1,252 22 1,274
-------- -------- --------
Total net revenues $415,947 $ 77,979 $493,926
-------- -------- --------
Operating expenses and operating expenses -
affiliated $144,203 $ 8,473 $152,676
Loss on disposal of assets -- 76 76
Interest expense 70,481 19,756 90,237
Management fees 21,646 4,249 25,895
Real estate taxes 22,828 4,465 27,293
Depreciation and amortization 87,651 22,884 110,535
-------- -------- --------
Total expenses $346,809 $ 59,903 $406,712
-------- -------- --------
Net income $ 69,138 $ 18,076 $ 87,214
======== ======== ========
</TABLE>
<TABLE>
Three Months Ended June 30, 1999
--------------------------------
Residential Commercial Total
----------- ---------- -----
<CAPTION>
<S> <C> <C> <C>
Rental income $416,906 $ 74,564 $491,470
Interest and other income 3,142 7 3,149
-------- -------- --------
Total net revenues $420,048 $ 74,571 $494,619
-------- -------- --------
Operating expenses and operating expenses -
affiliated $154,956 $ 10,131 $165,087
Interest expense -- 22,542 22,542
Management fees 21,329 4,474 25,803
Real estate taxes 22,710 4,426 27,136
Depreciation and amortization 95,025 22,902 117,927
-------- -------- --------
Total expenses $294,020 $ 64,475 $358,495
-------- -------- --------
Net income $126,028 $ 10,096 $136,124
======== ======== ========
</TABLE>
10
<PAGE>
10. Segment Reporting - Continued
------------------------------
<TABLE>
Six Months Ended June 30, 2000
------------------------------
Residential Commercial Total
----------- ---------- -----
<CAPTION>
<S> <C> <C> <C>
Rental income $801,608 $140,664 $942,272
Interest and other income 2,876 50 2,926
Gain on sale of assets 4,118 -- 4,118
-------- -------- --------
Total net revenues $808,602 $140,714 $949,316
-------- -------- --------
Operating expenses and operating expenses -
affiliated $274,087 $ 16,380 $290,467
Loss on disposal of assets 19,843 76 19,919
Interest expense 140,996 40,204 181,200
Management fees 41,720 8,200 49,920
Real estate taxes 45,656 8,930 54,586
Depreciation and amortization 174,921 45,786 220,707
-------- -------- --------
Total expenses $697,223 $119,576 $816,799
-------- -------- --------
Net income $111,379 $ 21,138 $132,517
======== ======== ========
</TABLE>
<TABLE>
Six Months Ended June 30, 1999
------------------------------
Residential Commercial Total
----------- ---------- -----
<CAPTION>
<S> <C> <C> <C>
Rental income $796,873 $149,128 $946,001
Interest and other income 5,444 7 5,451
-------- -------- --------
Total net revenues $802,317 $149,135 $951,452
-------- -------- --------
Operating expenses and operating expenses -
affiliated $294,495 $ 21,209 $315,704
Interest expense -- 45,717 45,717
Management fees 40,071 8,715 48,786
Real estate taxes 45,420 8,852 54,272
Depreciation and amortization 189,996 45,804 235,800
-------- -------- --------
Total expenses $569,982 $130,297 $700,279
-------- -------- --------
Net income $232,335 $ 18,838 $251,173
======== ======== ========
</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 six months ended June 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 June 30,
---------------------------
2000 1999
---- ----
<CAPTION>
NET REVENUES
------------
<S> <C> <C>
Total revenues for reportable segments $ 493,926 $ 494,619
Other income for Partnership 4,986 17,188
Eliminations -- (10,095)
---------- ----------
Total consolidated net revenues $ 498,912 $ 501,712
========== ==========
INTEREST EXPENSE
----------------
Interest expense for reportable segments $ 90,237 $ 22,542
Interest expense for Partnership -- 73,391
---------- ----------
Total interest expense $ 90,237 $ 95,933
========== ==========
DEPRECIATION AND AMORTIZATION
-----------------------------
Total depreciation and amortization for reportable segments $ 110,535 $ 117,927
Depreciation and amortization for Partnership 7,830 6,727
Eliminations (3,922) (3,922)
---------- ----------
Total depreciation and amortization $ 114,443 $ 120,732
========== ==========
NET INCOME (LOSS)
-----------------
Total net income for reportable segments $ 87,214 $ 136,124
Net loss for Partnership (29,223) (105,939)
Eliminations (14,153) (6,174)
---------- ----------
Total net income $ 43,838 $ 24,011
========== ==========
</TABLE>
12
<PAGE>
10. Segment Reporting - Continued
------------------------------
<TABLE>
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
<CAPTION>
NET REVENUES
------------
<S> <C> <C>
Total revenues for reportable segments $ 949,316 $ 951,452
Other income for Partnership 10,892 25,930
Eliminations -- (18,838)
---------- ----------
Total consolidated net revenues $ 960,208 $ 958,544
========== ==========
INTEREST EXPENSE
----------------
Interest expense for reportable segments $ 181,200 $ 45,717
Interest expense for Partnership -- 145,710
---------- ----------
Total interest expense $ 181,200 $ 191,427
========== ==========
DEPRECIATION AND AMORTIZATION
-----------------------------
Total depreciation and amortization for reportable segments $ 220,707 $ 235,800
Depreciation and amortization for Partnership 15,453 13,884
Eliminations (7,835) (7,843)
---------- ----------
Total depreciation and amortization $ 228,325 $ 241,841
========== ==========
NET INCOME (LOSS)
-----------------
Total net income for reportable segments $ 132,517 $ 251,173
Net loss for Partnership (78,232) (218,101)
Eliminations (13,303) (10,995)
---------- ----------
Total net income $ 40,982 $ 22,077
========== ==========
</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 June 30 were as
follows:
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Wholly-owned Properties
-----------------------
The Park at the Willows (1) 77% 94%
Park Place Apartments Phase II 88% 88%
Property Owned in Joint Venture with
------------------------------------
NTS-Properties IV and NTS-Properties Plus, Ltd.
----------------------------------------------
(Ownership % at June 30, 2000)
------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100%
(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 six months ended June 30 were as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Wholly-owned Properties
-----------------------
The Park at the Willows (1) 74% 95% 73% 92%
Park Place Apartments Phase II 87% 86% 84% 84%
Property Owned in Joint Venture with
------------------------------------
NTS-Properties IV and NTS-Properties Plus, Ltd.
----------------------------------------------
(Ownership % at June 30, 2000)
------------------------------
Blankenbaker Business Center 1A (31.34%) 100% 100% 100% 100%
(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.
Rental and other income generated by the Partnership's properties for the three
months and six months ended June 30 were as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Wholly-owned Properties
-----------------------
The Park at the Willows $ 76,153 $ 89,274 $146,323 $173,413
Park Place Apartments Phase II $339,795 $330,775 $662,278 $628,905
Property Owned in Joint Venture with
------------------------------------
NTS-Properties IV and NTS-Properties
------------------------------------
Plus, Ltd. (Ownership % at June 30, 2000)
-----------------------------------------
$ 77,978 $ 74,571 $140,714 $149,135
Blankenbaker Business Center 1A (31.34%) (1)
(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 six
months ended June 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.
The following is an analysis of material changes in the results of operations
for the periods ending June 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.
Operating expenses decreased approximately $13,200 or 13% and $15,000 or 8% for
the three months and six months ended June 30, 2000, respectively, as compared
to the same periods in 1999, mainly as a result of decreased cable expense at
Park Place Apartments Phase II (starting in the year 2000 residents are
responsible for their own cable). The decrease is also due to decreased
landscaping (switched to a monthly service contract in 2000) and utilities (Park
Place Apartments Phase III now shares in the common area expenses with Park
Place Apartments Phases I and II) at Park Place Apartments Phase II. The
decrease is partially offset by increased landscaping (switched lawncare
providers) and increased repairs and maintenance costs (due to turnover of
apartments) at The Park at the Willows.
Operating expenses - affiliated decreased approximately $10,200 or 8% for the
six months ended June 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
changes in staff, and 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 $19,900 for the six months ended
June 30, 2000, is the result of the retirement of assets that were not fully
depreciated. The retirements were the result of exterior renovations at The Park
at The Willows.
Interest expense decreased approximately $5,700 or 6% and $10,200 or 5% for the
three months and six months ended June 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 $5,300 or 20%
for the three months ended June 30, 2000, as compared to the same period in
1999. This decrease is due primarily to decreased information processing
services, legal fees related to tender offers and outside accounting fees.
Professional and administrative expenses increased approximately $4,000 or 8%
for the six months ended June 30, 2000, as compared to the same period in 1999,
as a result of increased general legal costs.
16
<PAGE>
Results of Operations - Continued
---------------------------------
Professional and administrative expenses - affiliated increased approximately
$6,800 or 43% and $6,300 or 18% for the three months and six months ended June
30, 2000, respectively, as compared to the same periods in 1999, primarily as a
result of increased finance and accounting salary costs due to changes in staff.
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 $6,300 or 5% and
$13,500 or 6% for the three months and six months ended June 30, 2000,
respectively, as compared to the same periods 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 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.
Consolidated Cash Flows and Financial Condition
-----------------------------------------------
Cash flows provided by (used in):
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Operating activities $ 294,887 $ 242,292
Investing activities (114,265) (37,048)
Financing activities (194,974) (172,832)
---------- ----------
Net (decrease) increase in cash and equivalents $ (14,352) $ 32,412
========== ==========
Net cash provided by operating activities increased approximately $52,600 or 22%
for the six months ended June 30, 2000, as compared to the same period in 1999.
The increase in net cash provided by operating activities was driven primarily
by increased collection of accounts receivable and increased escrow for property
taxes in 2000. The increase is partially offset by a decrease in accounts
payable in 2000.
The increase in net cash used in investing activities for the six months ended
June 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 increase in net cash used in financing activities for the six months ended
June 30, 2000, as compared to the same period in 1999, was mainly a result of
reserving $15,000 for the Third Tender Offer (See Notes to Financial Statements
- Note 7) that expires August 15, 2000. The increase is also due to increased
principal payments made on mortgages payable.
17
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
During the six months ended June 30, 2000 and 1999, the Partnership used cash
flow from operations and cash on hand to pay a 1% (annualized) cash distribution
of $56,135 (2000) and $57,145 (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 $385,910 at June 30, 2000.
The table below presents that portion of the distributions that represent a
return of capital on a GAAP basis for the six months ended June 30, 2000 and
1999.
Net Income Cash Distributions Return of
Allocated Declared Capital
--------- -------- -------
Limited Partners:
2000 $ 40,572 $ 55,574 $ 15,002
1999 21,856 56,574 34,718
General Partner:
2000 $ 410 $ 561 $ 151
1999 221 571 350
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 June 30, 2000, no roof
replacements have been started.
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 as of the date of the Third Tender Offer. Approximately $48,000
($30,000 to purchase 5,000 Units plus approximately $18,000 for expenses
associated with the Third Tender Offer) is required to purchase all 5,000 Units.
The Third Tender Offer stated that the Partnership will purchase the first 2,500
Units tendered and will fund its purchase and its portion of the expenses from
cash reserves. If more than 2,500 Units are tendered, ORIG, LLC. will purchase
up to an additional 2,500 Units. If more than 5,000 Units are tendered, the
Offerors may choose to acquire the additional Units on a pro rata basis. Units
that are acquired by the Partnership will be retired. Units that are acquired by
ORIG, LLC. will be held by it. The General Partner, NTS-
18
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
Properties Associates VII, does not intend to participate in the Third Tender
Offer. 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, with the Securities and Exchange Commission. This amendment
supplements and amends the Third Tender Offer to extend the expiration date of
the Third Tender Offer to August 15, 2000 and to expand the definition of
Offerors to include Mr. J.D. Nichols and Mr. Brian F. Lavin, each an affiliate
of the issuer. As of the date of this filing, 32,873 Units have been tendered.
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
June 30, 2000, a hypothetical 100 basis point increase in interest rates would
result in an approximate $240,000 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: August 11, 2000
22
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