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 September 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 unit data)
September 30, 2002
Assets
Cash and cash equivalents $ 567
Receivables and deposits 290
Restricted escrows 583
Other assets 646
Investment properties:
Land $ 3,738
Buildings and related personal property 45,652
49,390
Less accumulated depreciation (33,132) 16,258
$ 18,344
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 72
Tenant security deposit liabilities 130
Accrued property taxes 276
Other liabilities 452
Mortgage notes payable 23,738
Partners' Deficit:
General partner $ (366)
Limited partners (60,517 units
issued and outstanding) (5,958) (6,324)
$ 18,344
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenues: (Restated) (Restated)
Rental income $ 1,786 $ 1,819 $ 5,365 $ 5,469
Other income 163 76 429 256
Total revenues 1,949 1,895 5,794 5,725
Expenses:
Operating 729 792 2,153 2,243
General and administrative 111 88 364 343
Depreciation 518 505 1,559 1,536
Interest 444 425 1,355 1,255
Property taxes 110 116 335 326
Loss on early extinguishment
of debt -- 68 -- 68
Total expenses 1,912 1,994 5,766 5,771
Net income (loss) $ 37 $ (99) $ 28 $ (46)
Net loss allocated to general
partner (1%) $ -- $ (1) $ -- $ --
Net income (loss) allocated to
limited partners (99%) 37 (98) 28 (46)
$ 37 $ (99) $ 28 $ (46)
Net income (loss) per limited
partnership unit $ 0.61 $ (1.62) $ 0.46 $ (0.76)
Distributions per limited
partnership unit $ 6.63 $ 26.65 $ 27.35 $ 45.19
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 -- (17) (1,655) (1,672)
Net income for the nine months
ended September 30, 2002 -- -- 28 28
Partners' deficit at
September 30, 2002 60,517 $ (366) $(5,958) $(6,324)
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $ 28 $ (46)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,559 1,536
Amortization of loan costs 49 74
Loss on early extinguishment of debt -- 68
Change in accounts:
Receivables and deposits 139 (376)
Other assets (4) (51)
Accounts payable (37) (26)
Tenant security deposit liabilities 22 7
Accrued property taxes 276 221
Other liabilities 188 13
Net cash provided by operating activities 2,220 1,420
Cash flows from investing activities:
Property improvements and replacements (550) (690)
Net deposits to restricted escrows (44) (5)
Net cash used in investing activities (594) (695)
Cash flows from financing activities:
Payments on mortgage notes payable (299) (72)
Repayment of mortgage note payable -- (5,000)
Proceeds from mortgage note payable -- 7,000
Loan costs paid -- (260)
Distributions to partners (1,672) (2,763)
Net cash used in financing activities (1,971) (1,095)
Net decrease in cash and cash equivalents (345) (370)
Cash and cash equivalents at beginning of period 912 871
Cash and cash equivalents at end of period $ 567 $ 501
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,307 $ 1,171
See Accompanying Notes to Financial Statements
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
nine month periods ended September 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 fiscal 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.
Effective April 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt,"
required that all gains and losses from extinguishment of debt be aggregated
and, if material, classified as an extraordinary item. SFAS No. 145 rescinds
SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should
only be classified as extraordinary if they are unusual in nature and occur
infrequently. Neither of these criteria applies to the Partnership. As a result,
the accompanying statements of operations have been restated to reflect the loss
on early extinguishment of debt at Northwoods I and II Apartments in 2001 (see
"Note C") in operations rather than as an extraordinary item.
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 nine months ended September 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
$283,000 and $282,000 for the nine months ended September 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 $213,000 and
$428,000 for the nine months ended September 30, 2002 and 2001, respectively,
which is included in general and administrative expense and investment
properties. Included in these amounts are fees related to construction
management services provided by an affiliate of the Managing General Partner of
approximately $24,000 and $243,000 in construction service reimbursements for
the nine months ended September 30, 2002 and 2001, respectively. The
construction management service fees are calculated based on a percentage of
current year 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 of the nine month periods ended
September 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 paid approximately $29,000
during the nine months ended September 30, 2002 for such fees. The Managing
General Partner was not entitled to receive this fee during the nine months
ended September 30, 2001.
In addition, in connection with the refinancing of the mortgage loan encumbering
Northwoods I and II Apartments, the Partnership paid $70,000 in loan costs to an
affiliate during the nine months ended September 30, 2001. No such loan costs
were paid during the nine months ended September 30, 2002. These loan costs were
capitalized, are included in other assets and are amortized as interest expense
over the term of the loan.
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 September 30, 2002, the Partnership had 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 nine months ended
September 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 - Refinancing of Mortgage Note Payable
On August 31, 2001, the Partnership refinanced the mortgage encumbering
Northwoods I and II Apartments. The refinancing replaced indebtedness of
$5,000,000 with a new mortgage in the amount of $7,000,000. The interest rate on
the new mortgage is 7.06% as compared to 7.33% on the previous debt. The new
loan which matures on September 1, 2021 requires monthly principal and interest
payments and is scheduled to be fully amortized at maturity. Total capitalized
loan costs were approximately $253,000 during the nine months ended September
30, 2001. The Partnership recognized a loss on the early extinguishment of debt
of approximately $68,000 due to the write off of unamortized loan costs which is
reflected in operations.
On December 13, 1999, the Partnership refinanced the mortgage encumbering The
Pines Apartments. Additional loan costs of approximately $7,000 were capitalized
during the nine months ended September 30, 2001 related to this refinancing.
Note D - 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. On October 30, 2002, the court
entered an order extending the stay in effect through January 10, 2003.
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 Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. The matters discussed
in this report contain certain forward-looking statements, including, without
limitation, statements regarding future financial performance and the effect of
government regulations. The discussions of the Registrant's business and results
of operations, including forward-looking statements pertaining to such matters,
do not take into account the effects of any changes to the Registrant's business
and results of operations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors including, without limitation: national and local economic
conditions; the terms of governmental regulations that affect the Registrant and
interpretations of those regulations; the competitive environment in which the
Registrant operates; financing risks, including the risk that cash flows from
operations may be insufficient to meet required payments of principal and
interest; real estate risks, including variations of real estate values and the
general economic climate in local markets and competition for tenants in such
markets; and possible environmental liabilities. Readers should carefully review
the Registrant's financial statements and the notes thereto, as well as the risk
factors described in the documents the Registrant files from time to time with
the Securities and Exchange Commission.
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 nine month periods ended September 30, 2002 and 2001:
Average Occupancy
2002 2001
Fairway View II Apartments 93% 92%
Baton Rouge, Louisiana
The Pines Apartments 94% 95%
Roanoke, Virginia
Patchen Place Apartments 87% 88%
Lexington, Kentucky
Northwoods I and II Apartments 95% 94%
Pensacola, Florida
South Point Apartments 92% 94%
Durham, North Carolina
Results of Operations
The Registrant's net income for the nine months ended September 30, 2002 was
approximately $28,000 as compared to a net loss of approximately $46,000 for the
nine months ended September 30, 2001. The Registrant's net income for the three
months ended September 30, 2002 was approximately $37,000 as compared to a net
loss of approximately $99,000 for the three months ended September 30, 2001. The
increase in net income for the three and nine month periods ended September 30,
2002 was due to an increase in total revenues and a decrease in total expenses.
Total revenues increased for the three and nine month periods ended September
30, 2002 due to an increase in other income partially offset by a decrease in
rental income. Other income increased for the three and nine month periods ended
September 30, 2002 primarily due to increased utility reimbursements at The
Pines and Northwoods I and II Apartments, increased cable television income at
Fairway View II, South Point, Northwoods I and II, and The Pines Apartments, and
increased lease cancellation fees at Patchen Place, Northwoods I and II, and The
Pines Apartments. These increases were partially offset by reduced interest
income at all of the Partnership's properties as a result of lower interest
rates on cash balances maintained in interest bearing accounts. Rental income
decreased for the three and nine month periods ended September 30, 2002
primarily due to decreases in average rental rates at Fairway View II, The
Pines, Patchen Place and South Point Apartments, and an increase in bad debt
expense at Northwoods I and II Apartments partially offset by a decrease in
concessions at Fairway View II and South Point Apartments and an increase in
average rental rates at Northwoods I and II Apartments.
Total expenses decreased for the three and nine month periods ended September
30, 2002 due to decreases in operating expense and the recognition of a loss on
early extinguishment of debt during 2001 partially offset by increases in
depreciation, interest, and general and administrative expenses. Effective April
1, 2002, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44 and 64". SFAS No. 4
"Reporting Gains and Losses from Extinguishment of Debt," required that all
gains and losses from extinguishment of debt be aggregated and, if material,
classified as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and
accordingly, gains and losses from extinguishment of debt should only be
classified as extraordinary if they are unusual in nature and occur
infrequently. Neither of these criteria applies to the Partnership. As a result,
the accompanying statements of operations have been restated to reflect the loss
on early extinguishment of debt at Northwoods I and II Apartments in 2001 (as
discussed in "Liquidity and Capital Resources") in operations rather than as an
extraordinary item.
Operating expenses decreased primarily due to decreases in property and
insurance expenses. Property expense decreased primarily due to decreases in
administrative salaries at Fairway View II and Patchen Place Apartments and gas
bills at Patchen Place and The Pines Apartments partially offset by an increase
in total commissions at all of the Partnership's properties. Insurance expense
decreased primarily due to a decrease in insurance premiums at Northwoods I and
II Apartments. Depreciation expense increased primarily due to property
improvements and replacements completed during the last twelve months. Interest
expense increased 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. General and administrative
expenses increased due to increased Partnership management fees paid to the
Managing General Partner in connection with distributions made from operations.
Included in general and administrative expenses for the three and nine months
ended September 30, 2002 and 2001 are management reimbursements to the Managing
General Partner allowed under the Partnership Agreement. Also included are costs
associated with the quarterly communications with investors and regulatory
agencies and the annual audit required by the Partnership Agreement.
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 September 30, 2002, the Partnership had cash and cash equivalents of
approximately $567,000 as compared to approximately $501,000 at September 30,
2001. Cash and cash equivalents decreased by approximately $345,000 from the
Partnership's year ended December 31, 2001 due to approximately $1,971,000 of
cash used in financing activities and approximately $594,000 of cash used in
investing activities partially offset by approximately $2,220,000 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. 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 Partnership and to comply with
Federal, state and local legal and regulatory requirements. The Managing General
Partner monitors developments in the area of legal and regulatory compliance and
is studying new federal laws, including the Sarbanes-Oxley Act of 2002. The
Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures
with regard to governance, disclosure, audit and other areas. In light of these
changes, the Partnership expects that it will incur higher expenses related to
compliance, including increased legal and audit fees. Capital improvements for
each of the Partnership's properties are detailed below.
Fairway View II
During the nine months ended September 30, 2002, the Partnership completed
approximately $73,000 of capital improvements at Fairway View II, consisting
primarily of structural improvements, floor covering and 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
$163,000 for capital improvements, consisting primarily of air conditioning
unit, appliance and floor covering replacements, and window treatments.
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 Pines
During the nine months ended September 30, 2002, the Partnership completed
approximately $69,000 of capital improvements at The Pines, consisting primarily
of floor covering, appliance and 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 $84,000 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 nine months ended September 30, 2002, the Partnership completed
approximately $136,000 of capital improvements at Patchen Place, consisting
primarily of floor covering, appliance and air conditioning unit replacements,
and parking lot 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 $153,000
for capital improvements, consisting primarily of floor covering, appliance and
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 nine months ended September 30, 2002, the Partnership completed
approximately $139,000 of capital improvements at Northwoods I & II, consisting
primarily of floor covering, appliance and air conditioning unit replacements
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 $151,000 for capital
improvements, consisting primarily of air conditioning unit, appliance and floor
covering replacements, fitness equipment, swimming pool and 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 nine months ended September 30, 2002, the Partnership completed
approximately $133,000 of budgeted and nonbudgeted capital improvements at South
Point, consisting primarily of floor covering, appliance and air conditioning
unit replacements and water submetering. 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
$127,000 consisting primarily of air conditioning unit, appliance and floor
covering replacements, fitness equipment and water submetering. 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.
On August 31, 2001, the Partnership refinanced the mortgage encumbering
Northwoods I and II Apartments. The refinancing replaced indebtedness of
$5,000,000 with a new mortgage in the amount of $7,000,000. The interest rate on
the new mortgage is 7.06% as compared to 7.33% on the previous debt. The new
loan which matures on September 1, 2021 requires monthly principal and interest
payments and is scheduled to be fully amortized at maturity. Total capitalized
loan costs were approximately $253,000 during the nine months ended September
30, 2001. The Partnership recognized a loss on the early extinguishment of debt
of approximately $68,000 due to the write-off of unamortized loan costs which is
reflected in operations.
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 $23,738,000 has maturity dates ranging from
November 1, 2003 to December 1, 2021. The mortgage indebtedness of approximately
$16,138,000 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 nine months ended
September 30, 2002 and 2001 (in thousands, except per unit data):
Nine Months Per Limited Nine Months Per Limited
Ended Partnership Ended Partnership
September 30, 2002 Unit September 30, 2001 Unit
Operations $1,430 $23.38 $1,133 $18.54
Refinancing (1) 242 3.97 1,630 26.65
$1,672 $27.35 $2,763 $45.19
(1) Distribution from the remaining proceeds from the refinancing of Fairway
View II Apartments in November 2001 and the refinancing of Northwoods I
and II Apartments in August 2001, respectively.
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 41,629.67 limited partnership units
(the "Units") in the Partnership representing 68.79% of the outstanding units at
September 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. 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
68.79% 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 owes fiduciary duties to AIMCO as its sole stockholder. As
a result, the duties of the Managing General Partner, as managing general
partner, to the Partnership 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.
ITEM 3. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the Managing
General Partner, who are the equivalent of the Partnership's principal executive
officer and principal financial officer, respectively, have, within 90 days of
the filing date of this quarterly report, evaluated the effectiveness of the
Partnership's disclosure controls and procedures (as defined in Exchange Act
Rules (13a-14(c) and (15d-14(c)) and have determined that such disclosure
controls and procedures are adequate. There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect the Partnership's internal controls since the date of evaluation. The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.
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. On October 30, 2002, the court
entered an order extending the stay in effect through January 10, 2003.
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 September 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: November 13, 2002
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of National Property
Investors 7;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
_______________________
Patrick J. Foye
Executive Vice President of NPI Equity
Investments, Inc., equivalent of the chief
executive officer of the Partnership
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of National Property
Investors 7;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
_______________________
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of NPI Equity Investments, Inc.,
equivalent of the chief financial officer
of the Partnership
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 September 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: November 13, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 13, 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.