For the fiscal year ended December 31, 2003
OR
Commission File Number 0-17589
NTS-PROPERTIES VII, LTD.
(Exact name of registrant as specified in its charter)
| Florida | 61-1119232 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
| 10172 Linn Station Road | 40223 |
| Louisville, Kentucky | (Zip Code) |
| (Address of principal executive offices) |
Registrant’s telephone number, including area code: (502) 426-4800
Securities registered pursuant to Section 12(b) of the Act:
| None | None |
| (Title of each class) | (Name of each exchange on which registered) |
Securities pursuant to Section 12(g) of the Act:
Limited Partnership Interests
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of June 30, 2003: No aggregate market value can be determined because no established market exists for the limited partnership interests.
TABLE OF CONTENTS
PART I
| Pages | ||||
| Items 1. and 2. | Business and Properties | 3-10 | ||
| Item 3. | Legal Proceedings | 10-12 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 12 |
PART II
| Item 5. | Market for Registrant's Limited Partnership Interests and Related Partner Matters |
13 | ||
| Item 6. | Selected Financial Data | 14-15 | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
15-25 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
26 | ||
| Item 8. | Financial Statements and Supplementary Data | 27-55 | ||
| Item 9. | Change in and Disagreements with Accountants on Accounting and Financial Disclosure |
56 | ||
| Item 9A. | Controls and Procedures | 57 |
PART III
| Item 10. | Directors and Executive Officers of the Registrant | 58-59 | ||
| Item 11. | Management Remuneration and Transactions | 60 | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
61 | ||
| Item 13. | Certain Relationships and Related Transactions | 61-62 | ||
| Item 14. | Principal Accountant Fees and Services | 63 |
PART IV
| Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
64-67 | ||
| Signatures | 68 |
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Some of the statements included in this Form 10-K, particularly those included in Part I, Items 1 and 2 — Business and Properties, and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the statements relate to matters which have not yet occurred. For example, phrases such as “we anticipate,” “believe” or “expect” indicate that it is possible that the event anticipated, believed or expected may not occur. If these events do not occur, the result which we expected also may, or may not, occur in a different manner, which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our general partner’s best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those discussed below. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. See Part II — Item 7 for Cautionary Statements.
NTS-Properties VII, Ltd., a Florida limited partnership (the “Partnership”), was formed in 1987. The general partner is NTS-Properties Associates VII, a Kentucky limited partnership (the “General Partner”). The general partners of the General Partner are NTS Capital Corporation and J.D. Nichols. As of December 31, 2003, the Partnership owned the following properties and joint venture interest listed below. As used in this Annual Report on Form 10-K the terms “we,” “us” or “our,” as the context requires, may refer to the Partnership or its interests in these properties and joint venture:
| · | The Park at the Willows, a 48-unit luxury apartment complex located on a 2.8 acre tract in Louisville, Kentucky, acquired complete by us. |
| · | Park Place Apartments Phase II, a 132-unit luxury apartment complex located on an 11 acre tract in Lexington, Kentucky, constructed by us. |
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| · | A joint venture interest in Blankenbaker Business Center 1A, a business center with approximately 50,300 net rentable ground floor square feet and approximately 50,300 net rentable mezzanine square feet, located in Louisville, Kentucky, acquired complete by the joint venture between us and NTS-Properties Plus Ltd., an affiliate of our General Partner. The joint venture agreement was amended to admit NTS-Properties IV, an affiliate of our General Partner, (“NTS-Properties IV”) during 1994. Our percentage interest in the joint venture was 31.34% on December 31, 2003. |
We or the joint venture in which we are a partner has a fee title interest in the above properties. We believe that our properties are adequately covered by property insurance.
As of December 31, 2003, our properties were encumbered by mortgages as shown in the table below:
Interest Maturity Balance
Property Rate Date on 12/31/03
- ------------------------------------- ------------- ---------------- ------------------
Park Place Apartments Phase II 7.37% 10/15/12 (1) $ 3,339,017
Blankenbaker Business Center 1A 8.50% 11/15/05 (2) $ 1,186,699
| (1) | Monthly principal payments are based upon a 19-year amortization schedule. The outstanding principal balance at maturity based on the current rate of amortization is estimated to be approximately $1,436,000. |
| (2) | Current monthly principal payments are based upon an 11-year amortization schedule. At maturity, we believe the mortgage will have been repaid based on the current rate of amortization. |
The Park at the Willows was not encumbered by any outstanding mortgages on December 31, 2003.
We are presently engaged solely in the business of developing, constructing, owning and operating residential apartments. A presentation of information concerning industry segments is therefore not applicable.
General
Our current investment objectives are consistent with our original objectives, which are to provide cash distributions from the operation or financing of our properties, obtain long-term capital gain treatment on the sale or refinancing of properties, provide limited partners with deferrals of federal income taxes, and preserve limited partners’ capital. Proceeds of any sale or refinancing of our properties may be distributed to limited partners, or may be used to repay debt or to make capital improvements to properties.
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The properties we currently own, which are described in the following section, are the same as those we originally acquired. Our properties are in a condition suitable for their intended use. We periodically evaluate whether to retain, refinance, or sell or otherwise dispose of these properties, with a view toward meeting the above investment objectives, including the making of distributions. In deciding whether to sell a property, we will consider factors such as potential capital appreciation, mortgage pre-payment penalties, market conditions, cash flow and federal income tax considerations, including possible adverse federal income tax consequences to the limited partners. Distributions have been suspended to fund current and future capital improvements and debt repayment. For information on distributions, see Part II, Item 5 of this Form 10-K. In addition, see Item 8, Note 7 and Note 10 for information regarding our proposed merger with other affiliated entities.
The Park at the Willows
All apartments in The Park at the Willows are loft, one-bedroom or deluxe one-bedroom apartments. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators with ice makers, garbage disposals and microwave ovens. Loft and one-bedroom apartments have stackable washers and dryers. Deluxe apartments have washer/dryer hook-ups. In addition, pursuant to an agreement with the Willows of Plainview apartment community, which was developed adjacent to The Park at the Willows and is owned by NTS-Properties IV and NTS-Properties V, two publicly registered limited partnerships sponsored by an affiliate of our General Partner, tenants of The Park at the Willows have access to and use of the coin-operated washer/dryer facilities, clubhouse, management offices, swimming pool, whirlpool and tennis courts at The Willows of Plainview. We share proportionately in the costs of maintaining and operating these facilities.
As of December 31, 2003, monthly rental rates at The Park at the Willows start at $604 for one-bedroom apartments, $699 for deluxe apartments and $749 for lofts, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 83% (2003), 90% (2002), 75% (2001), 90% (2000) and 81% (1999). See Part II, Item 7 for average occupancy information.
Park Place Apartments Phase II
Apartments at Park Place Apartments Phase II include one-bedroom and two-bedroom apartments and two-bedroom town homes. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators with ice makers, garbage disposals and microwave ovens. Each unit has either a washer/dryer hook-up or access to coin-operated washers and dryers. Amenities include the clubhouse with a party room, swimming pool, tennis
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courts, racquetball courts, exercise facility and management offices. The amenities are shared with Phase I and Phase III of the Park Place Development which were developed and constructed by NTS-Properties VI, an affiliate of our General Partner. The costs to construct and operate the common amenities are shared proportionately by each phase.
As of December 31, 2003, monthly rental rates at Park Place Apartments Phase II start at $719 for one-bedroom apartments, $959 for two-bedroom apartments and $1,169 for two-bedroom town homes, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 83% (2003), 89% (2002), 76% (2001), 77% (2000) and 86% (1999). See Part II, Item 7 for average occupancy information.
Blankenbaker Business Center Joint Venture
A single tenant leases 100% of the Blankenbaker Business Center 1A building. The annual base rent, which does not include the cost of utilities, is $7.48 per square foot. The lease term is for 11 years and expires July 2005. The lease provides for the tenant to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. The tenant is a professional service entity in the insurance industry. The occupancy level at the business center as of December 31, 2003, 2002, 2001, 2000 and 1999 was 100%. See Part II, Item 7 for average occupancy information.
The following table contains approximate data concerning the major tenant lease in effect on December 31, 2003:
Year of Square Feet and % of Current Annual Rental
Major Tenant (1): Expiration Net Rentable Area (2) per Square Foot
- --------------------------- ------------------ -------------------------- ---------------------------
1 2005 100,640 (100%) $7.48
| (1) | Major tenants are those that individually occupy 10% or more of the rentable square footage. |
| (2) | Rentable area includes ground floor and mezzanine square feet. |
Additional operating data regarding our properties and joint venture is furnished in the following table:
Federal Tax Property Tax Annual Property
Basis Rate Taxes
------------------ ----------------- ------------------
Wholly-Owned Properties
The Park at the Willows $ 2,688,506 .010935 $ 15,003
Park Place Apartments Phase II $ 9,869,437 .009600 $ 63,051
Joint Venture Property
Blankenbaker Business Center 1A $ 7,447,033 .010935 $ 51,938
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Depreciation for book purposes is computed using the straight-line method over the estimated useful lives of the assets which are 7-30 years for land improvements, 7-30 years for buildings and improvements, 5-30 years for amenities and the applicable lease term for tenant improvements.
Blankenbaker Business Center Joint Venture
On December 28, 1990, we entered into a joint venture agreement with NTS-Properties Plus Ltd. to own and operate Blankenbaker Business Center 1A and to acquire an approximately 2.49 acre parking lot that was being leased by the business center from an affiliate of our General Partner. The use of the parking lot is a provision of the tenant’s lease agreement with the business center. On August 16, 1994, the Blankenbaker Business Center Joint Venture Agreement was amended to admit NTS-Properties IV to the joint venture. The terms of the joint venture shall continue until dissolved. Dissolution shall occur upon, but not before, the first to occur of the following:
| · | the withdrawal, bankruptcy or dissolution of a partner or the execution by a partner of an assignment for the benefit of its creditors; |
| · | the sale, condemnation or taking by eminent domain of all or substantially all of the assets of the real property and parking lot and the sale and/or collection of any evidences of indebtedness received in connection therewith; |
| · | the vote or consent of each of the partners to dissolve the Partnership; or |
| · | December 31, 2030. |
The net cash flow for each calendar quarter is distributed to the partners in accordance with their respective percentage interests. The term “Net Cash Flow” for any period shall mean the excess, if any of A) the sum of (i) the gross receipts of the joint venture property for such period, other than capital contributions plus (ii) any funds released by the partners for previously established reserves (referred to in clause (B) (iv) below), over (B) the sum of (i) all cash operating expenses paid by the joint venture property during such period in the course of business, (ii) capital expenditures paid in cash during such period, (iii) payments during such period on account of amortization of the principal of any debts or liabilities of the joint venture property and (iv) reserves for contingent liabilities and future expenses of the joint venture property as established by the partners; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall only be taken into account to the extent not funded by capital contributions or paid out of previously established reserves. “Percentage Interest” means that percentage which the capital contribution of a partner bears to the aggregate capital contributions of all the partners. Net income or net loss is also allocated between the partners pursuant to their Percentage Interest as described in the joint venture agreement. Our ownership share was 31.34% on December 31, 2003, 2002 and 2001. We use the equity method of accounting for this joint venture.
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The joint venture obtained permanent financing of $4,800,000 in November 1994. The outstanding balance on December 31, 2003 was approximately $1,187,000. The mortgage bears interest at a fixed rate of 8.5% and is due November 15, 2005. Currently, monthly principal payments are based upon an 11-year amortization schedule. At maturity, we believe the mortgage will have been repaid based on the current rate of amortization.
In June 2002, NTS-Properties Plus Ltd., one of the original members of the Blankenbaker Business Center joint venture, merged into ORIG, LLC, an affiliate of ours. As a result of the merger, ORIG has succeeded to the interests of NTS-Properties Plus Ltd. in the joint venture. See the information under the caption “Ownership of Joint Venture” in Part II, Item 7 of this Form 10-K.
Our properties are subject to competition from similar types of properties (including, in certain areas, properties owned or managed by affiliates of our General Partner) in the respective vicinities in which they are located. Such competition is generally for the retention of existing tenants at lease expiration or for new tenants when vacancies occur. We maintain the suitability and competitiveness of our properties primarily on the basis of effective rents, amenities and service provided to tenants. Competition is expected to increase in the future as a result of the construction of additional properties. As of December 31, 2003, properties under construction, or scheduled to start construction in 2004, in the respective vicinities in which our properties are located are as follows: In the vicinity of The Park at the Willows, there are two apartment communities scheduled to start construction in 2004 and three apartment communities that are currently under construction and scheduled for completion in 2004. Of the two apartment communities scheduled to start construction, one is planning to build a total of 502 apartments with 252 apartments expected to be completed in 2004. The other apartment community scheduled to begin construction in 2004 is planning to build 200 apartments. The three apartment communities currently under construction will have a total of 406 apartments upon completion. The largest of the three communities will have 250 units. Of the two remaining communities, one will have 120 apartments and the other will have 36 apartments. In the vicinity of Park Place Apartments Phase II, there is one community of approximately 90 apartments currently under construction. The apartments are scheduled for completion in May 2004. This property will be marketed as student housing. We have not commissioned a formal market analysis of competitive conditions in any market in which we own properties, but rely upon the market condition knowledge of the employees at NTS Development Company who manage and supervise leasing for each property. See “Conflict of Interest.”
NTS Development Company, an affiliate of our General Partner, directs the management of our properties pursuant to a written agreement (the “Agreement”). NTS Development Company is a wholly-owned subsidiary of NTS Corporation. Mr. J.D. Nichols has a controlling interest in NTS Corporation and is a general partner of NTS-Properties Associates VII. Under the Agreement, NTS Development Company establishes rental policies and rates and directs the marketing activity of
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leasing personnel. NTS Development Company also coordinates the purchase of equipment and supplies, maintenance activity and the selection of all vendors, suppliers and independent contractors.
As compensation for its services, NTS Development Company received $82,176 in property management fees from our residential properties for the year ended December 31, 2003. The fee is equal to 5% of gross revenues from residential properties.
In addition, the Agreement requires us to purchase all insurance relating to the managed properties, to pay the direct out-of-pocket expenses of NTS Development Company in connection with our operations, including the cost of goods and materials used for and on our behalf, and to reimburse NTS Development Company for the salaries, commissions, fringe benefits and related employment expenses of personnel.
The term of the Agreement between NTS Development Company and us was initially for five years, and renewed thereafter for succeeding one-year periods, until cancelled. The Agreement is subject to cancellation by either party upon 60-days written notice. As of December 31, 2003, the Agreement is still in effect.
Information about our working capital practices is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
We do not consider our operations to be seasonal to any material degree.
Principals of the General Partner or its affiliates own or operate real estate properties that compete, directly or indirectly, with properties owned by us. Because we were organized by, and are operated by the General Partner, conflicts arising from our competition with properties owned by affiliated partnerships are not resolved through arms-length negotiations, but through the exercise of the General Partner’s judgment consistent with its fiduciary responsibility to the limited partners and our investment objectives and policies. The General Partner is accountable to the limited partners as a fiduciary and consequently must exercise good faith and integrity in handling our affairs. A provision has been made in our Partnership Agreement that the General Partner will not be liable to us except for acts or omissions performed or omitted fraudulently, in bad faith or with negligence. The Partnership Agreement provides for indemnification of the General Partner by us for liability resulting from errors in judgment or certain acts or omissions. The General Partner and its affiliates have the right to compete with our properties including the right to develop competing properties now and in the future, in addition to the existing properties which may compete directly or indirectly.
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NTS Development Company, an affiliate of our General Partner, acts in a similar capacity for other affiliated entities in the same geographic region where we have property interests. As a result of the affiliation between NTS Development Company and our General Partner, there is a conflict of interest between our General Partner’s duty to the limited partners and its incentive to cause us to retain our properties because of the payment of fees to NTS Development Company. We believe the agreement with NTS Development Company is on terms no less favorable to us than those which could be obtained from a third party for similar services in the same geographical region in which the properties are located. The contract is terminable by either party without penalty upon 60-days written notice.
We have no employees. Under the terms of the property management agreement with NTS Development Company, NTS Development Company makes its employees available to perform services for us. In addition to the property management fees that we pay to NTS Development Company, we reimburse this affiliate for the actual costs of providing such services. See Part II, Item 8 — Note 6 and Part III, Item 13 for further discussions of related party transactions.
Our website address is www.ntsdevelopment.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available and may be accessed free of charge through the “About NTS” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa originally captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us. The action purports to bring claims on behalf of a class of limited partners. These claims are based on, among other things, tender offers made by the public partnerships and an affiliate of our general partner, as well as the operation of the partnerships by the general partners. The plaintiffs allege, among other things, that the prices at which limited partnership interests were purchased in these tender offers were too low. The plaintiffs are seeking monetary damages and equitable relief, including an order directing the disposition of the properties owned by the public partnerships and the distribution of the proceeds. No amounts have been accrued as a liability for this action in our financial statements. Under an indemnification agreement with our general partner, we are responsible for the costs of defending any such action.
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On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) against our general partner, the general partners of three public partnerships affiliated with us and several individuals and entities affiliated with us. On March 21, 2003, the complaint was amended to include the general partner of a public partnership affiliated with us and the general partner of a partnership that was affiliated with us but is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and affiliated public partnerships based on alleged overpayments of fees, prohibited investments, improper failures to make distributions, purchases of limited partnership interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the public partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued as a liability for this action in our financial statements. Our general partner believes that this action is without merit, and is vigorously defending it. On March 2, 2004, we, along with all defendants, filed a Motion to Dismiss the Bohm litigation. That Motion is currently pending before the court.
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle (the “Settlement Agreement”) with representatives of the class of plaintiffs to settle the Buchanan action. This settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for all of the claims asserted in the Buchanan litigation and the Bohm litigation. As part of the proposed settlement, the general partners have agreed, among other things, to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed entity. For more information on the merger, see Item 7, Proposed Merger.
On February 26, 2004, the Superior Court of the State of California for the County of Contra Costa preliminarily approved the settlement as set forth in the Stipulation and Agreement of Settlement jointly filed by the general partners (the “General Partners”) of NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI and NTS-Properties VII, Ltd. (the “Partnerships”), along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) on December 5, 2003. The Superior Court’s order, which sets forth its preliminary determination that the Stipulation and Agreement of Settlement is within the range of reasonableness, and is fair, just and adequate to the class of plaintiffs, is filed as an attachment to our Form 8-K filed on March 1, 2004. The Superior Court has scheduled a hearing (the “Final Hearing”) on May 6, 2004, to finally determine, among other things, whether: (1) the Stipulation and Agreement of Settlement is fair, reasonable and adequate, and in the best interests of the class of plaintiffs, and (2) the Buchanan litigation should be dismissed with prejudice and on the merits in accordance with the Stipulation and Agreement of Settlement.
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At the Final Hearing, any member of the class of plaintiffs may appear personally or through his or her counsel to object to the final approval of the Stipulation and Agreement of Settlement, the entry of a final judgment dismissing with prejudice the Buchanan litigation or the application for an award of attorneys’ fees and expenses to the counsel for the class of plaintiffs. To do so, a class member must file the following with the Superior Court and the attorneys for the class of plaintiffs and the General Partners and other defendants at least fourteen days prior to the Final Hearing: (1) a notice of the class member’s intention to appear at the Final Hearing, (2) a detailed statement of the class member’s specific objections and (3) the grounds for the objections and any documents that the class member desires the Superior Court to consider.
Pending the entry by the Superior Court of a final judgment and order dismissing the Buchanan litigation with prejudice, all members of the class of plaintiffs are barred and enjoined from: (1) transferring, selling, assigning or otherwise disposing of any limited partner units of the Partnerships, (2) granting a proxy to object to the merger of the Partnerships into NTS Realty Holdings Limited Partnership (“NTS Realty”) as contemplated by the joint consent solicitation statement/prospectus that NTS Realty filed with the Securities and Exchange Commission or (3) commencing a tender offer for the limited partner units of the Partnerships.
For the year ended December 31, 2003, our share of the legal costs for the Buchanan and Bohm litigations was approximately $96,000, which was included in our professional and administrative expenses.
We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our financial position or results of operations, except as discussed herein.
None.
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There is no established trading market for the limited partnership interests. We had 769 limited partners as of January 31, 2004. Cash distributions and allocations of income (loss) are made as described in Item 8 — Note 1E.
No distributions were paid during 2003, 2002 or 2001. Quarterly distributions are determined based on current cash balances, cash flow being generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements. Distributions have been indefinitely suspended to fund current and future capital improvements and debt repayment. Our ability to pay distributions is dependent upon, among other things, our ability to refinance properties on favorable terms.
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Years ended December 31:
2003 2002 2001 2000 1999
--------------- --------------- --------------- --------------- ----------------
Total revenues $ 1,637,858 $ 1,515,528 $ 1,528,920 $ 1,617,578 $ 1,649,799
Operating (loss) income $ (10,020) $ (47,137)$ 78,961 $ 279,401 $ 293,490
Income from investment
in joint venture $ 87,757 $ 95,935 $ 77,932 $ 54,881 $ 52,317
Net (loss) income $ (170,319) $ (211,696)$ (157,345)$ 29,049 $ 76,896
Net (loss) income
allocated to:
General Partner $ (1,703) $ (2,117)$ (1,573)$ 290 $ 769
Limited partners $ (168,616) $ (209,579)$ (155,772)$ 28,759 $ 76,127
Net (loss) income per
limited partnership
interest $ (0.31) $ (0.38)$ (0.28)$ 0.05$ 0.13
Weighted average number
of limited partnership
interests 552,236 552,236 553,031 554,828 567,325
Cumulative net loss
allocated to:
General Partner $ (31,057) $ (29,354)$ (27,237)$ (25,664)$ (25,954)
Limited partners $ (3,074,747) $ (2,906,131)$ (2,696,552)$ (2,540,780)$ (2,569,539)
Cumulative taxable
income (loss) allocated to:
General Partner $ 25,359 $ 26,476 $ 26,437 $ 26,699 $ 26,100
Limited partners $ (3,168,949) $ (2,962,914)$ (2,876,673)$ (2,781,494)$ (2,809,106)
Distributions declared:
General Partner $ -- $ -- $ -- $ 840 $ 1,138
Limited partners $ -- $ -- $ -- $ 83,236 $ 112,646
Cumulative distributions
declared:
General Partner $ 27,445 $ 27,445 $ 27,445 $ 27,445 $ 26,605
Limited partners $ 2,717,046 $ 2,717,046 $ 2,717,046 $ 2,717,046 $ 2,633,810
At year end:
Cash and equivalents $ 263,655 $ 382,533 $ 431,232 $ 307,173 $ 396,110
Land, buildings and
amenities, net $ 7,091,886 $ 7,299,579 $ 7,730,705 $ 8,088,455 $ 8,327,056
Total assets $ 8,222,331 $ 8,432,230 $ 8,820,883 $ 9,004,494 $ 9,282,186
Mortgages and notes
payable $ 3,339,017 $ 3,494,218 $ 3,659,778 $ 3,756,533 $ 3,876,398
The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Form 10-K report.
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The Emerging Issues Tasks Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) 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 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. We have applied the consensus to all comparative financial statements, restating them to conform with the consensus for all periods presented. The application of this consensus did not result in a restatement of previously reported partners’ equity or results of operations, but did result in a recharacterization or reclassification of certain financial statements’ captions and amounts. The data in the table above has been restated for all periods presented.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Financial Statements in Item 8 and the cautionary statements below.
General
A critical accounting policy is one that would materially effect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
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Impairment and Valuation
Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” specifies circumstances in which certain long-lived assets must be reviewed for impairment. If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
Recognition of Rental Income
Our apartment communities have operating leases with apartment residents with terms generally of twelve months or less. We recognize rental revenue related to these leases on an accrual basis when due from residents. In accordance with our standard lease terms, rental payments are generally due on a monthly basis.
Cost Capitalization and Depreciation Policies
We review all expenditures and capitalize any item exceeding $1,000 deemed to be an upgrade or a tenant improvement with an expected useful life greater than one year. Land, building and amenities are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements have estimated useful lives between 7 — 30 years, land improvements have estimated useful lives of between 7 — 30 years, and amenities have estimated useful lives between 5 — 30 years.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary interest entity, make additional disclosures. Certain
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disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:
| (i) | Special purpose entities (“SPEs”) created prior to February 1, 2003. We must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. |
| (ii) | Non-SPEs created prior to February 1, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
| (iii) | All entities, regardless of whether a SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
The adoption of the provisions applicable to FIN 46 did not have any impact on our financial statements.
The following table includes our selected summarized operating data for the years ended December 31, 2003, 2002 and 2001. This data is presented to provide assistance in identifying trends in our operating results and other factors affecting our business. This data should be read in conjunction with our financial statements, including the notes thereto, in Part II, Item 8 of this report.
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
Total revenues $ 1,637,858 $ 1,515,528 $ 1,528,920
Operating expenses and operating expenses - affiliated 670,462 684,638 649,971
Depreciation and amortization 407,690 501,168 452,914
Interest expense 254,763 266,573 277,416
Net loss (170,319) (211,696) (157,345)
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Rental income and tenant reimbursements generated by our properties and joint venture for the years ended December 31 were as follows:
2003 2002 2001
-------------- ------------- -------------
Wholly-Owned Properties
The Park at the Willows (1) $ 298,890 $ 323,104 $ 352,921
Park Place Apartments Phase II (1) $ 1,338,968 $ 1,192,424 $ 1,175,999
Joint Venture Property
(Ownership % on December 31, 2003)
Blankenbaker Business Center 1A (31.34%) (1) $ 949,011 $ 951,763 $ 934,612
| (1) | We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
The occupancy levels at our properties and joint venture as of December 31 were as follows:
2003 2002 2001
-------------- ------------- -------------
Wholly-Owned Properties
The Park at the Willows (2) 83% 90% 75%
Park Place Apartments Phase II (2) 83% 89% 76%
Joint Venture Property
(Ownership % on December 31, 2003)
Blankenbaker Business Center 1A (31.34%) (2) 100% 100% 100%
| (2) | We believe the changes in occupancy on December 31 from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
The average occupancy levels at our properties and joint venture for the years ended December 31 were as follows:
2003 2002 2001
-------------- ------------- -------------
Wholly-Owned Properties
The Park at the Willows (3) 81% 83% 90%
Park Place Apartments Phase II (3) 89% 82% 77%
Joint Venture Property
(Ownership % on December 31, 2003)
Blankenbaker Business Center 1A (31.34%) (3) 100% 100% 100%
| (3) | We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
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We are making efforts to improve occupancy at our apartment communities. We have an on-site leasing staff, who are employees of NTS Development Company, at each of the apartment communities. The staff handles all on-site visits from potential tenants, coordinates local advertising with NTS Development Company’s marketing staff, makes visits to local companies to promote fully furnished apartments and works with current residents on lease renewals.
The lease at Blankenbaker Business Center 1A provides for the tenant to contribute toward the payment of common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that residential leases are generally for a period of one year, should protect our operations from the impact of inflation and changing prices.
The following discussion relating to changes in our results of operations includes only material line items within our Statements of Operations or line items for which there was a material change between the years ending December 31, 2003, 2002 and 2001.
Rental Income
Our rental income for the years ended December 31, 2003 and 2002 was approximately $1,638,000 and $1,516,000, respectively. The increase of approximately $122,000, or 8%, is primarily the result of increased average occupancy at Park Place Apartments Phase II partially offset by a decrease in average occupancy at The Park at the Willows.
Rental income for the years ended December 31, 2002 and 2001 was approximately $1,516,000 and $1,529,000, respectively. The decrease of approximately $13,000, or 1%, is not a significant change. There were no offsetting material changes.
Operating Expenses and Operating Expenses — Affiliated
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $406,000 and $418,000, respectively. The decrease of approximately $12,000, or 3%, is not a significant change. There were no offsetting material changes.
Operating expenses for the years ended December 31, 2002 and 2001 were approximately $418,000 and $396,000, respectively. The increase of approximately $22,000, or 6%, is not a significant change. There were no offsetting material changes.
Operating expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $264,000 and $266,000, respectively. The decrease of approximately $2,000, or 1%, is not a significant change. There were no offsetting material changes.
Operating expenses – affiliated for the years ended December 31, 2002 and 2001 were approximately $266,000 and $254,000, respectively. The increase of approximately $12,000, or 5%, is not a significant change. There were no offsetting material changes.
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Operating expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Professional and Administrative Expenses and Professional and Administrative Expenses —Affiliated
Our professional and administrative expenses for the years ended December 31, 2003 and 2002 were approximately $278,000 and $100,000, respectively. The increase of approximately $178,000, or 178%, is primarily the result of increased legal and professional fees related to our proposed merger and litigation filed by limited partners. See Part II, Item 8 — Note 7 and Note 10 for information regarding our proposed merger and litigation filed by limited partners.
Our professional and administrative expenses for the years ended December 31, 2002 and 2001 were approximately $100,000 and $72,000, respectively. The increase of approximately $28,000, or 39%, is primarily due to increased legal and professional services as a result of litigation filed by limited partners.
Our professional and administrative expenses — affiliated for the years ended December 31, 2003 and 2002 were approximately $132,000 and $115,000, respectively. The increase of approximately $17,000, or 15%, is primarily the result of increased personnel costs.
Our professional and administrative expenses – affiliated for the years ended December 31, 2002 and 2001 were approximately $115,000 and $109,000, respectively. The increase of approximately $6,000, or 6%, is not a significant change. There were no offsetting material changes.
Professional and administrative expenses — affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Depreciation and Amortization Expense
Our depreciation and amortization expenses for the years ended December 31, 2003 and 2002 were approximately $408,000 and $501,000, respectively. The decrease of approximately $93,000, or 19%, is primarily the result of the roof assets at Park Place Apartments Phase II becoming fully depreciated by December 31, 2002.
Our depreciation and amortization expenses for the years ended December 31, 2002 and 2001 were approximately $501,000 and $453,000, respectively. The increase of approximately $48,000, or 11%, is primarily due to management’s change in the estimated useful life of all of the roof assets at Park Place Apartments Phase II in July 2001. The estimated useful life was reduced in anticipation of replacing the roofs.
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Interest Expense
Interest expense for the years ended December 31, 2003 and 2002 was approximately $255,000 and $267,000, respectively. The decrease of approximately $12,000, or 4%, is not a significant change. There were no offsetting material changes.
Interest expense for the years ended December 31, 2002 and 2001 was approximately $267,000 and $277,000, respectively. The decrease of approximately $10,000, or 4%, is not a significant change. There were no offsetting material changes.
The majority of our cash flow is derived from operating activities. Cash flows used in investing activities consist of amounts spent for capital improvements at our properties. Cash flows used in financing activities consist principally of principal payments on mortgages payable. We do not expect any material changes in the mix and relative cost of capital resources from those in 2003.
The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:
2003 2002 2001
-------------- ------------- -------------
Operating activities $ 274,452 $ 184,149 $ 421,539
Investing activities (238,129) (67,288) (194,725)
Financing activities (155,201) (165,560) (102,755)
-------------- ------------- -------------
Net (decrease) increase in cash and equivalents $ (118,878)$ (48,699)$ 124,059
============== ============= =============
Net cash provided by operating activities increased from approximately $184,000 for the year ended December 31, 2002 to approximately $274,000 for the year ended December 31, 2003. The increase was primarily driven by the change in accounts payable which was partially offset by the change in other liabilities. The increased accounts payable includes amounts due for professional services related to our litigation filed by limited partners and proposed merger.
Net cash provided by operating activities decreased from approximately $422,000 for the year ended December 31, 2001 to approximately $184,000 for the year ended December 31, 2002. The decrease was primarily driven by the use of cash to reduce outstanding accounts payable and the increased operating loss.
Net cash used in investing activities increased from approximately $67,000 for the year ended December 31, 2002 to approximately $238,000 for the year ended December 31, 2003. The increase was primarily the result of increased capital expenditures at Park Place Apartments Phase II and The Park at the Willows.
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Net cash used in investing activities decreased from approximately $195,000 for the year ended December 31, 2001 to approximately $67,000 for the year ended December 31, 2002. The decrease was primarily the result of decreased capital expenditures at Park Place Apartments Phase II, partially offset by increased capital expenditures at The Park at the Willows.
Net cash used in financing activities decreased from approximately $166,000 for the year ended December 31, 2002 to approximately $155,000 for the year ended December 31, 2003. The decrease was primarily the result of decreased principal payments made in 2003.
Net cash used in financing activities increased from approximately $103,000 for the year ended December 31, 2001 to approximately $166,000 for the year ended December 31, 2002. The increase was primarily the result of loan proceeds received in 2001 for capital improvements and increased principal payments made in 2002.
On January 24, 2001, we notified our limited partners that we would be suspending distributions starting with the fourth quarter 2000. The suspension is necessary to build up cash reserves in contemplation of the roof replacements at Park Place Apartments Phase II (mentioned below). Once sufficient reserves are accumulated, we will review cash, working capital levels and projections for their use, and resume distributions if appropriate.
See Part II, Item 8 – Financial Statements and Supplementary Data, Note 5 — Mortgage and Notes Payable, for details regarding our material indebtedness.
Due to the fact that no distributions were made during 2003, 2002 or 2001, the table which presents that portion of the distributions that represents a return of capital based on GAAP has been omitted.
Future Liquidity
We believe the current occupancy levels are considered adequate to fund the operations of our properties. However, our future liquidity depends significantly on our properties’ occupancy remaining at a level which provides for debt payments and adequate working capital, currently and in the future. If occupancy were to fall below that level and remain at or below that level for a significant period of time, our ability to make payments due under our debt agreements and to continue paying daily operational costs would be greatly impaired. In addition, we may be required to obtain financing in connection with the capital improvements and leasing costs described below.
The primary source of future liquidity is expected to be derived from cash generated by our properties after adequate cash reserves are established for future leasing, roof replacements and renovations. It is anticipated that the cash flow from operations combined with our cash reserves will be sufficient to meet these needs. Cash reserves (which are unrestricted cash and equivalents as shown on our balance sheet as of December 31) were $263,655, $382,533 and $431,232 on December 31, 2003, 2002 and 2001, respectively.
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We are aware that the sole commercial tenant of our joint venture’s commercial building is making efforts to seek alternatives to renewing its expiring lease. The failure of this tenant to renew its lease would result in a loss of annual rental revenue and operating expense recoveries of approximately $938,000 to the joint venture. Income from our investment in the joint venture that owns this property would decrease accordingly. This would significantly affect our liquidity, and could result in significant costs to refurbish the vacated space and locate a new tenant. At this time, we are not certain whether the tenant intends to renew its lease as allowed by the lease agreement, or vacate its space.
The demand on future liquidity is anticipated to increase as a result of the replacement of the roofs at Park Place Apartments Phase II (18 buildings) all of which were installed using shingles produced by a single manufacturer. The shingles appear to contain defects which may cause the roofs to fail. As the shingle manufacturer has declared bankruptcy, we do not expect to be able to recover any of the costs of the roof replacements in the event of any such failures. We do not have sufficient working capital to make all of the roof replacements at one time. As of December 31, 2003, fifteen roof replacements have been completed. The total cost of replacing the remaining roofs is estimated to be $60,000 ($20,000 per building). The three remaining roof replacements have been budgeted for 2004.
We had no other material commitments for renovations or capital expenditures as of December 31, 2003.
As part of the Settlement Agreement, our general partner and the general partners of the four public partnerships affiliated with us, have agreed to pursue a merger of the partnerships and several other affiliated real estate entities into a newly formed limited partnership known as NTS Realty Holdings Limited Partnership (“NTS Realty”). The merger is subject to, among other things, approval by a majority of the limited partner interests in each partnership and final approval of the Superior Court. We may not seek the approval of the limited partners until a filing made by NTS Realty with the Securities and Exchange Commission is declared effective. For the year ended December 31, 2003, our share of the legal and professional fees for the proposed merger was approximately $70,000.
On June 25, 2002, NTS-Properties Plus Ltd. merged with ORIG, LLC, (“ORIG”) an affiliate of ours. ORIG is the surviving entity as a result of this merger. NTS-Properties VII, Ltd. continues to hold a 31.34% interest in the Blankenbaker Business Center Joint Venture after the completion of the NTS-Properties Plus Ltd./ORIG Merger. ORIG now holds a 39.05% interest in the Blankenbaker Business Center Joint Venture.
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The following disclosure represents our obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under contingent commitments, such as debt guarantees.
Payments Due by Period
--------------------------------------------------------------------------
Within One One - Three Three - Five After 5
Contractual Obligations Total Year Years Years Years
- -------------------------------- ------------- ------------- ------------- ------------- -------------
Long-term debt $ 3,339,017 $ 160,841 $ 359,559 $ 416,390 $ 2,402,227
Capital lease obligations $ -- $ -- $ -- $ -- $ --
Operating leases (1) $ -- $ -- $ -- $ -- $ --
Other long-term obligations (2) $ -- $ -- $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
Total contractual cash
obligations $ 3,339,017 $ 160,841 $ 359,559 $ 416,390 $ 2,402,227
============= ============= ============= ============= =============
| (1) | We are party to numerous small operating leases for office equipment such as copiers, postage machines and fax machines, which represent an insignificant obligation. |
| (2) | We are party to several annual maintenance agreements with vendors for such items as outdoor maintenance, pool service and security systems, which we may or may not renew each year. |
Amount of Commitment Expiration Per Period
-----------------------------------------------------------
Total
Other Commercial Amounts Within One One - Three Three - Five Over 5
Commitments Committed Year Years Years Years
- ------------------------------- -------------- ------------- ------------- ------------- -------------
Line of credit $ -- $ -- $ -- $ -- $ --
Standby letters of credit and
guarantees (1) $ 1,186,699 $ 595,096 $ 591,603 $ -- $ --
Other commercial
commitments (2) $ -- $ -- $ -- $ -- $ --
-------------- ------------- ------------- ------------- -------------
Total commercial
commitments $ 1,186,699 $ 595,096 $ 591,603 $ -- $ --
============== ============= ============= ============= =============
| (1) | We are a guarantor, along with NTS-Properties Plus Ltd., of Blankenbaker Business Center 1A’s mortgage. The balance in the table represents 100% of the outstanding mortgage balance, of which we are jointly and severally liable. |
| (2) | We do not, as a practice, enter into long term purchase commitments for commodities or services. We may from time to time agree to “fee for service arrangements” which are for a term of greater than one year. |
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Our liquidity, capital resources and results of operations are subject to a number of risks and uncertainties including, but not limited to the following:
| · | our ability to achieve planned revenues; |
| · | our ability to control expenses relative to fluctuating revenues; |
| · | our ability to make payments due under our debt agreements; |
| · | our ability 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 our business strategy; |
| · | trends in the economy as a whole which may affect consumer confidence and demand for the types of rental property held by us; |
| · | our ability to predict the demand for specific rental properties; |
| · | our ability 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; |
| · | the risk of a major commercial tenant defaulting on its lease due to risks generally associated with real estate, many of which are beyond our control, including general or local economic conditions, competition, interest rates, real estate tax rates, other operating expenses and acts of God; and |
| · | the risk of revised zoning laws, taxes, and utilities regulations as well as municipal mergers of local governmental entities. |
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Our primary market risk exposure with regard to financial instruments is changes in interest rates. Our mortgage payable bears interest at a fixed rate. A hypothetical 100 basis point increase in interest rates would result in an approximate $182,000 decrease in the fair value of debt.
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To NTS-Properties VII, Ltd.:
We have audited the accompanying balance sheets of NTS-Properties VII, Ltd. (the “Partnership”) as of December 31, 2003 and 2002, and the related statements of operations, partners’ equity and cash flows for each of the two years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these