United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to _________
Commission file number 0-13454
NATIONAL PROPERTY INVESTORS 7
(Exact name of small business issuer as specified in its charter)
California 13-3230613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, Post Office Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL PROPERTY INVESTORS 7
BALANCE SHEET
(Unaudited)
(in thousands, except per unit data)
June 30, 2002
Assets
Cash and cash equivalents $ 414
Receivables and deposits 355
Restricted escrows 572
Other assets 702
Investment properties:
Land $ 3,738
Buildings and related personal property 45,455
49,193
Less accumulated depreciation (32,614) 16,579
$ 18,622
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 129
Tenant security deposit liabilities 127
Accrued property taxes 165
Other liabilities 317
Mortgage notes payable 23,840
Partners' Deficit:
General partner $ (362)
Limited partners (60,517 units
issued and outstanding) (5,594) (5,956)
$ 18,622
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues:
Rental income $ 1,797 $ 1,822 $ 3,579 $ 3,650
Other income 138 95 266 180
Total revenues 1,935 1,917 3,845 3,830
Expenses:
Operating 689 674 1,424 1,451
General and administrative 167 101 253 255
Depreciation 526 517 1,041 1,031
Interest 455 415 911 830
Property taxes 113 106 225 210
Total expenses 1,950 1,813 3,854 3,777
Net (loss) income $ (15) $ 104 $ (9) $ 53
Net (loss) income allocated to
general partner (1%) $ -- $ 1 $ -- $ 1
Net (loss) income allocated to
limited partners (99%) (15) 103 (9) 52
$ (15) $ 104 $ (9) $ 53
Net (loss) income per limited
partnership unit $ (0.25) $ 1.70 $ (0.15) $ 0.86
Distributions per limited
partnership unit $ 20.72 $ 6.74 $ 20.72 $ 18.54
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 60,517 $ 1 $30,259 $30,260
Partners' deficit at
December 31, 2001 60,517 $ (349) $(4,331) $(4,680)
Distributions to partners -- (13) (1,254) (1,267)
Net loss for the six months
Ended June 30, 2002 -- -- (9) (9)
Partners' deficit at
June 30, 2002 60,517 $ (362) $(5,594) $(5,956)
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net (loss) income $ (9) $ 53
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 1,041 1,031
Amortization of loan costs 38 50
Change in accounts:
Receivables and deposits 74 (113)
Other assets (38) (10)
Accounts payable (21) (70)
Tenant security deposit liabilities 19 5
Accrued property taxes 165 105
Other liabilities 53 186
Net cash provided by operating activities 1,322 1,237
Cash flows from investing activities:
Property improvements and replacements (312) (209)
Net deposits to restricted escrows (33) (48)
Net cash used in investing activities (345) (257)
Cash flows from financing activities:
Payments on mortgage notes payable (197) (47)
Loan costs paid (11) (7)
Distributions to partners (1,267) (1,133)
Net cash used in financing activities (1,475) (1,187)
Net decrease in cash and cash equivalents (498) (207)
Cash and cash equivalents at beginning of period 912 871
Cash and cash equivalents at end of period $ 414 $ 664
Supplemental disclosure of cash flow information:
Cash paid for interest $ 873 $ 780
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts
payable $ 41 $ --
See Accompanying Notes to Financial Statements
e)
NATIONAL PROPERTY INVESTORS 7
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited financial statements of National Property Investors 7
(the "Partnership" or "Registrant") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of NPI Equity Investments, Inc. (the "Managing General Partner"),
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
six month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2002. For
further information, refer to the financial statements and footnotes thereto
included in the Partnership's Annual Report on Form 10-KSB for the year ended
December 31, 2001. The Managing General Partner is an affiliate of Apartment
Investment and Management Company ("AIMCO"), a publicly traded real estate
investment trust.
Note B - Transactions with Affiliated Parties
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
Partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
During the six months ended June 30, 2002 and 2001, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Partnership's properties as compensation for providing property management
services. The Registrant paid to such affiliates approximately $188,000 and
$189,000 for the six months ended June 30, 2002 and 2001, respectively, which is
included in operating expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $148,000 and
$124,000 for the six months ended June 30, 2002 and 2001, respectively, which is
included in general and administrative and operating expenses and investment
properties. Included in the total is approximately $19,000 in construction
service reimbursements for the six months ended June 30, 2002. There were no
such reimbursements for the six months ended June 30, 2001. The construction
management service fees are calculated based on a percentage of additions to
investment properties.
For services relating to the administration of the Partnership and operation of
Partnership properties, the Managing General Partner is entitled to receive
payment for non-accountable expenses up to a maximum of $150,000 per year from
distributions from operations, based upon the number of Partnership units sold,
subject to certain limitations. The Managing General Partner received
approximately $91,000 in reimbursements for both the six month periods ended
June 30, 2002 and 2001, which is included in general and administrative
expenses.
For managing the affairs of the Partnership, the Managing General Partner of the
Partnership is entitled to receive a partnership management fee. The fee is
equal to 4% of the Partnership's adjusted cash from operations, as defined in
the Partnership Agreement, in any year, provided that 50% of the fee shall not
be paid until the Partnership has distributed to the limited partners adjusted
cash from operations in such year which is equal to 5% of the limited partners'
adjusted invested capital, as defined, on a non-cumulative basis. In addition,
50% of the fee shall not be paid until the Partnership has distributed to the
limited partners adjusted cash from operations in such year which is equal to 8%
of the limited partners' adjusted invested capital on a non-cumulative basis.
The fee shall be paid when adjusted cash from operations is distributed to the
limited partners. The Managing General Partner was not entitled to receive this
fee during the six months ended June 30, 2002 or 2001.
The Managing General Partner has extended to the Partnership a line of credit of
up to $500,000. Loans under the line of credit will have a term of 365 days, are
unsecured and bear interest at the rate of 2% per annum in excess of the prime
rate announced from time to time by Chase Manhattan Bank, N.A. The maturity date
of such borrowing will be accelerated in the event of: (i) the removal of the
Managing General Partner (whether or not For Cause); (ii) the sale or
refinancing of a property by the Partnership; or (iii) the liquidation of the
Partnership. At the present time, the Partnership has no outstanding amounts due
under this line of credit.
Beginning in 2001, the Partnership began insuring its properties up to certain
limits through coverage provided by AIMCO which is generally self-insured for a
portion of losses and liabilities related to workers compensation, property
casualty and vehicle liability. The Partnership insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the Managing General Partner. During the six months ended June
30, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates
approximately $78,000 and $70,000, respectively, for insurance coverage and fees
associated with policy claims administration.
Note C - Legal Proceedings
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Managing General Partner and
several of their affiliated partnerships and corporate entities. The action
purports to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) which are named as nominal defendants, challenging, among other
things, the acquisition of interests in certain Managing General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking dismissal
of the action. In lieu of responding to the motion, the plaintiffs filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as ordered by the court, was submitted by the parties.
On July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to the
Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time. The
discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
operation. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
The Partnership's investment properties consist of five apartment complexes. The
following table sets forth the average occupancy of the properties for each of
the six month periods ended June 30, 2002 and 2001:
Average Occupancy
2002 2001
Fairway View II Apartments 92% 91%
Baton Rouge, Louisiana
The Pines Apartments 94% 96%
Roanoke, Virginia
Patchen Place Apartments 83% 90%
Lexington, Kentucky
Northwoods I and II Apartments 96% 93%
Pensacola, Florida
South Point Apartments 92% 94%
Durham, North Carolina
The Managing General Partner attributes the decrease in occupancy at Patchen
Place Apartments to an increase in new apartment communities recently built in
the area. Management is implementing new marketing strategies to make Patchen
Place more competitive within its market. The Managing General Partner
attributes the increase in occupancy at Northwoods I and II Apartments to the
completion of a road expansion project which increased new prospect traffic as
well as the property's curb appeal.
Results of Operations
The Registrant's net loss for the six months ended June 30, 2002 was
approximately $9,000 compared to net income of approximately $53,000 for the six
months ended June 30, 2001. The Registrant's net loss for the three months ended
June 30, 2002 was approximately $15,000 as compared to net income of
approximately $104,000 for the three months ended June 30, 2001. The decrease in
net income for the three and six months ended June 30, 2002 was due to an
increase in total expenses which was partially offset by an increase in total
revenues.
Total expenses increased for the six months ended June 30, 2002 due to increases
in depreciation, interest and property tax expenses which were partially offset
by a decrease in operating expenses. Total expenses increased for the three
months ended June 30, 2002 due to increases in interest, operating, and general
and administrative expenses. Depreciation expense increased for the six months
ended June 30, 2002 due to property improvements and replacements completed
during the last twelve months. Interest expense increased for the three and six
months ended June 30, 2002 due to the refinancings of Northwoods I and II
Apartments in August 2001 and Fairway View II Apartments in November 2001 which
increased the average debt balance at these two properties. Property tax expense
increased for the six months ended June 30, 2002 due to the timing of the
receipt of the tax bills at Fairway View II and South Point Apartments which
affected the tax accruals recorded for the respective periods. Operating
expenses decreased for the six months ended June 30, 2002 primarily due to
decreased gas bills at The Pines and Patchen Place Apartments, decreased
employee salaries at Patchen Place Apartments, and decreased maintenance
expenses at Northwoods I and II and South Point Apartments. These decreases were
partially offset by increased insurance expense at all of the Partnership's
properties. Operating expenses increased for the three months ended June 30,
2002 primarily due to increased insurance expenses partially offset by reduced
property expenses. Insurance expense increased due to an increase in insurance
premiums at all of the Partnership's properties. Property expenses decreased due
to reduced utility charges primarily at Patchen Place and The Pines Apartments
and reduced payroll and related benefits primarily at Patchen Place Apartments.
General and administrative expenses remained relatively constant for the six
months ended June 30, 2002 and 2001, respectively. General and administrative
expenses increased for the three months ended June 30, 2002 due to the timing of
fees paid to the Managing General Partner in connection with distributions made
from operations. Included in general and administrative expenses for the three
and six months ended June 30, 2002 and 2001 are management reimbursement to the
Managing General Partner allowed under the Partnership Agreement. In addition,
costs associated with the quarterly communications with investors and regulatory
agencies and the annual audit required by the Partnership Agreement are also
included.
Total revenues increased for the three and six month periods ended June 30, 2002
due to an increase in other income partially offset by a decrease in rental
income. Other income increased for the three and six month periods ended June
30, 2002 primarily due to increased utility reimbursements at The Pines and
Northwoods I and II Apartments and increased late charges and increased cable
television revenue at all of the Partnership's properties. These increases were
partially offset by reduced interest income as a result of lower interest rates
on interest bearing accounts. Rental income decreased for the three and six
month periods ended June 30, 2002 primarily due to decreases in occupancy at The
Pines, Patchen Place and South Point Apartments and decreases in average rental
rates at Patchen Place and South Point Apartments partially offset by a decrease
in concessions at Fairway View II, Patchen Place and South Point Apartments and
an increase in average rental rates at Fairway View II Apartments.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expense. As part of this plan, the Managing General Partner attempts to protect
the Registrant from the burden of inflation-related increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market conditions, which can result in the use of rental concessions
and rental reductions to offset softening market conditions, there is no
guarantee that the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At June 30, 2002, the Partnership had cash and cash equivalents of approximately
$414,000 as compared to approximately $664,000 at June 30, 2001. Cash and cash
equivalents decreased by approximately $498,000 from the Partnership's year
ended December 31, 2001 due to approximately $1,475,000 of cash used in
financing activities and approximately $345,000 of cash used in investing
activities, which more than offset approximately $1,322,000 of cash provided by
operating activities. Cash used in financing activities consisted of
distributions to partners and, to a lesser extent, payments of principal made on
the mortgages encumbering Fairway View II, The Pines and Northwoods I and II
Apartments and loan costs paid for South Point Apartments. Cash used in
investing activities consisted of property improvements and replacements and net
deposits to escrow accounts maintained by the mortgage lender. The Partnership
invests its working capital reserves in interest bearing accounts.
The Managing General Partner has extended to the Partnership a $500,000 line of
credit. The Partnership has no outstanding amounts due under this line of
credit. Based on present plans, the Managing General Partner does not anticipate
the need to borrow against the line of credit in the near future. Other than
cash and cash equivalents, the line of credit is the Partnership's only unused
source of liquidity.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Registrant and to comply with
Federal, state and local legal and regulatory requirements. Capital improvements
for each of the Registrant's properties are detailed below.
Fairway View II
During the six months ended June 30, 2002, the Partnership completed
approximately $32,000 of capital improvements at Fairway View II, consisting
primarily of floor covering replacements, air conditioning unit replacements,
and building improvements. These improvements were funded from operating cash
flow. The Partnership has evaluated the capital improvement needs of the
property for the current year and, as a result budgeted approximately $155,000
for capital improvements, consisting primarily of air conditioning unit
replacements, appliances, floor covering replacements, and window treatments.
Additional improvements may be considered and will depend on the physical
condition of the property as well as anticipated cash flow generated by the
property.
The Pines
During the six months ended June 30, 2002, the Partnership completed
approximately $53,000 of capital improvements at The Pines, consisting primarily
of floor covering replacements, appliances, air conditioning unit replacements,
and cabinet upgrades. These improvements were funded from operating cash flow.
The Partnership has evaluated the capital improvement needs of the property for
the current year and, as a result budgeted approximately $79,000 for capital
improvements, consisting primarily of floor covering replacements. Additional
improvements may be considered and will depend on the physical condition of the
property as well as anticipated cash flow generated by the property.
Patchen Place
During the six months ended June 30, 2002, the Partnership completed
approximately $84,000 of capital improvements at Patchen Place, consisting
primarily of floor covering replacements, appliances, air conditioning unit
replacements, and parking lot upgrades. These improvements were funded from
operating cash flow and replacement reserves. The Partnership has evaluated the
capital improvement needs of the property for the current year and, as a result
budgeted approximately $141,000 for capital improvements, consisting primarily
of floor covering replacements, appliances, air conditioning unit replacements,
and plumbing upgrades. Additional improvements may be considered and will depend
on the physical condition of the property as well as replacement reserves and
anticipated cash flow generated by the property.
Northwoods I and II
During the six months ended June 30, 2002, the Partnership completed
approximately $83,000 of capital improvements at Northwoods I & II, consisting
primarily of floor covering replacements, appliances, and fitness equipment.
These improvements were funded from operating cash flow. The Partnership has
evaluated the capital improvement needs of the property for the current year
and, as a result budgeted approximately $138,000 for capital improvements,
consisting primarily of air conditioning unit replacements, fitness equipment,
floor covering replacements, swimming pool improvements, appliances, structural
improvements, and plumbing upgrades. Additional improvements may be considered
and will depend on the physical condition of the property as well as anticipated
cash flow generated by the property.
South Point
During the six months ended June 30, 2002, the Partnership completed
approximately $101,000 of capital improvements at South Point, consisting
primarily of floor covering replacements, appliances, water submetering and air
conditioning unit replacements. These improvements were funded from operating
cash flow and replacement reserves. The Partnership has evaluated the capital
improvement needs of the property for the current year and, as a result budgeted
approximately $118,000 consisting primarily of air conditioning unit
replacements, appliances, fitness equipment, water submetering and floor
covering replacements. Additional improvements may be considered and will depend
on the physical condition of the property as well as replacement reserves and
anticipated cash flow generated by the property.
The additional capital improvements will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $23,840,000 has maturity dates ranging from
November 1, 2003 to December 1, 2021. The mortgage indebtedness of approximately
$16,240,000 that was refinanced during 2000 and 2001 requires monthly payments
until the loans mature between January 2020 and December 2021 at which time the
loans are scheduled to be fully amortized. The Partnership's other mortgage
indebtedness of $7,600,000 requires interest only payments with balloon payments
due November 1, 2003. The Managing General Partner will attempt to refinance
such indebtedness and/or sell the properties prior to such maturity dates. If
the properties cannot be refinanced or sold for a sufficient amount, the
Registrant may risk losing such properties through foreclosure.
Pursuant to the Partnership Agreement, the term of the Partnership is scheduled
to expire on December 31, 2008. Accordingly, prior to such date the Partnership
will need to either sell its investment properties or extend the term of the
Partnership.
The Partnership distributed the following amounts during the six months ended
June 30, 2002 and 2001 (in thousands, except per unit data):
Six Months Per Limited Six Months Per Limited
Ended Partnership Ended Partnership
June 30, 2002 Unit June 30, 2001 Unit
Operations $1,267 $20.72 $1,133 $18.54
Future cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves and the timing of debt maturities,
refinancings and/or property sales. The Partnership's cash available for
distribution is reviewed on a monthly basis. There can be no assurance, however,
that the Partnership will generate sufficient funds from operations after
required capital expenditures, to permit further distributions to its partners
during the remainder of 2002 or subsequent periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 42,879.67 limited partnership units
in the Partnership representing 70.86% of the outstanding units at June 30,
2002. A number of these units were acquired pursuant to tender offers made by
AIMCO or its affiliates. It is possible that AIMCO or its affiliates will
acquire additional units of limited partnership interest in the Partnership in
exchange for cash or a combination of cash and units in the operating
partnership of AIMCO either through private purchases or tender offers. In this
regard, on June 25, 2002, a tender offer by AIMCO Properties, L.P., to acquire
any and all of the units not owned by affiliates of AIMCO for a purchase price
of $114.00 per unit expired. Pursuant to this offer, AIMCO acquired 1,242 units
during the quarter ended June 30, 2002. Under the Partnership Agreement,
unitholders holding a majority of the units are entitled to take action with
respect to a variety of matters which would include voting on certain amendments
to the Partnership Agreement and voting to remove the Managing General Partner.
As a result of its ownership of 70.86% of the outstanding units, AIMCO is in a
position to influence all voting decisions with respect to the Registrant.
Although the Managing General Partner owes fiduciary duties to the limited
partners of the Partnership, the Managing General Partner also owed fiduciary
duties to AIMCO as its sole stockholder. As a result, the duties of the Managing
General Partner, as managing general partner, to the Partnerships and its
limited partners may come into conflict with the duties of the Managing General
Partner to AIMCO, as its sole stockholder. However, DeForest Ventures II L.P.,
from whom AIMCO, through its merger with Insignia, acquired 25,399 Units (41.97%
of the units), had agreed for the benefit of non-tendering unit holders, that it
would vote its units: (i) against any increase in compensation payable to the
Managing General Partner or to affiliates; and (ii) on all other matters
submitted by it or its affiliates, in proportion to the votes cast by all other
unit holders. Except for the foregoing, no other limitations are imposed on
AIMCO's or its affiliates right to vote each unit acquired.
Critical Accounting Policies and Estimates
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States which require the Partnership to make
estimates and assumptions. The Partnership believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
Impairment of Long-Lived Assets
Investment properties are recorded at cost, less accumulated depreciation,
unless considered impaired. If events or circumstances indicate that the
carrying amount of a property may be impaired, the Partnership will make an
assessment of its recoverability by estimating the undiscounted future cash
flows, excluding interest charges, of the property. If the carrying amount
exceeds the aggregate future cash flows, the Partnership would recognize an
impairment loss to the extent the carrying amount exceeds the fair value of the
property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the
Partnership's investment properties. These factors include changes in the
national, regional and local economic climate; local conditions, such as an
oversupply of multifamily properties; competition from other available
multifamily property owners and changes in market rental rates. Any adverse
changes in these factors could cause an impairment in the Partnership's assets.
Revenue Recognition
The Partnership generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area.
Concessions are charged to income as incurred.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Managing General Partner and
several of their affiliated partnerships and corporate entities. The action
purports to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) which are named as nominal defendants, challenging, among other
things, the acquisition of interests in certain Managing General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking dismissal
of the action. In lieu of responding to the motion, the plaintiffs filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as ordered by the court, was submitted by the parties.
On July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to the
Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 3.4(a), Agreement of Limited Partnership,
incorporated by reference to Exhibit A to the Prospectus of
the Partnership dated July 5, 1978, included in the
Partnership's Registration Statement on Form S-11 (Reg. No.
2-599991).
Exhibit 3.4(b), Amendments to Agreement of Limited
Partnership, incorporated by reference to the Definitive Proxy
Statement of the Partnership, dated July 2, 1981.
Exhibit 3.4(c), Amendments to Agreement of Limited
Partnership, incorporated by reference to the Definitive Proxy
Statement of the Partnership, dated April 3, 1991.
Exhibit 3.4(d), Amendments to the Agreement of Limited
Partnership, incorporated by reference to the Statement
Furnished in Connection with the Solicitation of Consents of
the Partnership dated August 28, 1992.
Exhibit 99, Certification of Chief Executive Officer and
Chief Financial Officer.
b) Reports on Form 8-K filed during the quarter ended June 30,
2002:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATIONAL PROPERTY INVESTORS 7
By: NPI EQUITY INVESTMENTS, INC.
Its Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: August 14, 2002
Exhibit 99
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of National Property
Investors 7 (the "Partnership"), for the quarterly period ended June 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Patrick J. Foye, as the equivalent of the Chief Executive Officer of
the Partnership, and Paul J. McAuliffe, as the equivalent of the Chief Financial
Officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/ Patrick J. Foye
Name: Patrick J. Foye
Date: August 14, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: August 14, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.