United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to _________
Commission file number 0-13454
NATIONAL PROPERTY INVESTORS 7
(Exact name of registrant 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)
March 31, 2003
Assets
Cash and cash equivalents $ 491
Receivables and deposits 269
Restricted escrows 606
Other assets 620
Investment properties:
Land $ 3,738
Buildings and related personal property 45,848
49,586
Less accumulated depreciation (34,188) 15,398
$ 17,384
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 91
Tenant security deposit liabilities 126
Accrued property taxes 102
Other liabilities 368
Mortgage notes payable 23,530
Partners' Deficit:
General partner $ (371)
Limited partners (60,517 units
issued and outstanding) (6,462) (6,833)
$ 17,384
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended
March 31,
2003 2002
Revenues:
Rental income $1,763 $1,782
Other income 117 128
Total revenues 1,880 1,910
Expenses:
Operating 766 735
General and administrative 112 86
Depreciation 530 515
Interest 448 456
Property taxes 96 112
Total expenses 1,952 1,904
Net (loss) income $ (72) $ 6
Net loss allocated to general partner (1%) $ (1) $ --
Net (loss) income allocated to limited partners (99%) (71) 6
$ (72) $ 6
Net (loss) income per limited partnership unit $(1.17) $ 0.10
Distributions per limited partnership unit $ 5.37 $ --
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, 2002 60,517 $ (366) $(6,066) $(6,432)
Distributions to partners -- (4) (325) (329)
Net loss for the three months
ended March 31, 2003 -- (1) (71) (72)
Partners' deficit at
March 31, 2003 60,517 $ (371) $(6,462) $(6,833)
See Accompanying Notes to Financial Statements
NATIONAL PROPERTY INVESTORS 7
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2003 2002
Cash flows from operating activities:
Net (loss) income $ (72) $ 6
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 530 515
Amortization of loan costs 19 19
Change in accounts:
Receivables and deposits (44) 175
Other assets (51) (81)
Accounts payable 14 33
Tenant security deposit liabilities (6) 5
Accrued property taxes 102 91
Other liabilities (96) 178
Net cash provided by operating activities 396 941
Cash flows from investing activities:
Property improvements and replacements (95) (182)
Net withdrawals from restricted escrows 10 --
Net cash used in investing activities (85) (182)
Cash flows from financing activities:
Payments on mortgage notes payable (105) (98)
Distributions to partners (329) --
Net cash used in financing activities (434) (98)
Net (decrease) increase in cash and cash equivalents (123) 661
Cash and cash equivalents at beginning of period 614 912
Cash and cash equivalents at end of period $ 491 $ 1,573
Supplemental disclosure of cash flow information:
Cash paid for interest $ 430 $ 438
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
month period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2003. 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, 2002. 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 three months ended March 31, 2003 and 2002, 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 Partnership paid to such affiliates approximately
$92,000 and $94,000 for the three months ended March 31, 2003 and 2002,
respectively, which is included in operating expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $69,000 and
$80,000 for the three months ended March 31, 2003 and 2002, 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 $2,000
and $12,000 in construction service fees for the three months ended March 31,
2003 and 2002, respectively. 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 $29,000 in reimbursements for the three month period ended March
31, 2003, which is included in general and administrative expenses. No such fees
were paid during the same period in 2002.
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 three months ended March 31, 2003 or 2002.
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 March 31, 2003, the Partnership had no outstanding amounts due
under this line of credit.
The Partnership insures 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 2003 and 2002, the Partnership's cost for
insurance coverage and fees associated with policy claims administration will be
approximately $92,000 and $78,000, respectively.
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 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 could have an
opportunity to discuss settlement. On October 30, 2002, the court entered an
order extending the stay in effect through January 10, 2003.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below. On April
4, 2003, the Court preliminarily approved the settlement and scheduled a hearing
on final approval for June 2, 2003.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Managing General Partner has also agreed to make
a tender offer to purchase all of the partnership interests in the Partnerships
within one year of final approval, if it is granted, and to provide partners
with the independent appraisals at the time of these tenders. The proposed
settlement also provides for the limitation of the allowable costs which the
Managing General Partner or its affiliates will charge the Partnerships in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation. On April 11, 2003, notice was distributed to limited
partners providing the details of the proposed 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. Before completing briefing on the appeal, the parties stayed
further proceedings in the appeal pending the Court's review of the terms of the
proposed settlement described above.
The Managing General Partner does not anticipate that any costs to the
Partnership, 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 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 three month periods ended March 31, 2003 and 2002:
Average Occupancy
2003 2002
Fairway View II Apartments 92% 90%
Baton Rouge, Louisiana
The Pines Apartments 91% 92%
Roanoke, Virginia
Patchen Place Apartments 95% 80%
Lexington, Kentucky
Northwoods I and II Apartments 95% 95%
Pensacola, Florida
South Point Apartments 90% 94%
Durham, North Carolina
The Managing General Partner attributes the increase in occupancy at Patchen
Place Apartments to increased marketing efforts. The decrease in occupancy at
South Point Apartments is due to a slow economy and increased competition in the
area of the property.
Results of Operations
The Partnership's net loss for the three months ended March 31, 2003 was
approximately $72,000 as compared to net income of approximately $6,000 for the
three months ended March 31, 2002. The increase in net loss for the three month
period ended March 31, 2003 was due to an increase in total expenses and a
decrease in total revenues.
Total expenses increased due to increases in operating, general and
administrative and depreciation expenses partially offset by a decrease in
property tax expense. Operating expenses increased primarily due to increases in
property and maintenance expenses partially offset by a decrease in insurance
expense. Property expense increased primarily due to increases in payroll and
related benefits at Patchen Place and Northwoods I and II Apartments and utility
charges at Patchen Place and The Pines Apartments. Maintenance expense increased
at Fairway View II, The Pines, Northwoods I and II, and South Point Apartments
due to decreases in the capitalization of certain direct and indirect costs,
primarily payroll related costs and increases in contract repairs at all of the
Partnership's properties. Insurance expense decreased due to a decrease in
insurance premiums primarily at Northwoods I and II and The Pines Apartments.
General and administrative expenses increased primarily due to increased fees
paid to the Managing General Partner in connection with distributions made from
operations. Also included in general and administrative expenses at both March
31, 2003 and 2002 are management reimbursements to the Managing General Partner
as allowed under the Partnership Agreement, management fees paid to the Managing
General Partner in connection with distributions made from operations, costs
associated with the quarterly and annual communications with investors and
regulatory agencies and the annual audit required by the Partnership Agreement.
Depreciation expense increased primarily due to property improvements and
replacements completed during the last twelve months. Property taxes decreased
primarily due to a lower tax rate at Northwoods I and II Apartments.
Total revenues decreased due to decreases in rental and other income. Rental
income decreased primarily due to decreases in average rental rates at South
Point, Patchen Place, and The Pines Apartments and a decrease in occupancy at
South Point Apartments partially offset by an increase in occupancy at Patchen
Place and Fairway View II Apartments. Other income decreased primarily due to
decreased lease cancellation fees and late charges at Patchen Place 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 Partnership 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 March 31, 2003, the Partnership had cash and cash equivalents of
approximately $491,000 as compared to approximately $1,573,000 at March 31,
2002. Cash and cash equivalents decreased by approximately $123,000 from the
Partnership's year ended December 31, 2002 due to approximately $434,000 of cash
used in financing activities and approximately $85,000 of cash used in investing
activities partially offset by approximately $396,000 of cash provided by
operating activities. Cash used in financing activities consisted of payments of
principal made on the mortgages encumbering Fairway View II, The Pines and
Northwoods I and II Apartments and distributions to partners. Cash used in
investing activities consisted of property improvements and replacements
partially offset by net withdrawals from escrow accounts maintained by the
mortgage lenders. 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 three months ended March 31, 2003, the Partnership completed
approximately $4,000 of capital improvements at Fairway View II Apartments,
consisting primarily of floor covering and appliance replacements. These
improvements were funded from operating cash flow. The Partnership evaluates the
capital improvement needs of the property during the year and currently expects
to complete an additional $211,000 in capital improvements during the remainder
of 2003. The additional capital improvements will consist primarily of floor
covering, air conditioning unit, appliance and roofing replacements, parking lot
upgrades, and balcony repairs. Additional capital improvements may be considered
and will depend on the physical condition of the property as well as capital
reserves and the anticipated cash flow generated by the property.
The Pines
During the three months ended March 31, 2003, the Partnership completed
approximately $10,000 of capital improvements at The Pines Apartments,
consisting primarily of floor covering and appliance replacements and office
computer upgrades. These improvements were funded from operating cash flow. The
Partnership evaluates the capital improvement needs of the property during the
year and currently expects to complete an additional $55,000 in capital
improvements during the remainder of 2003. The additional capital improvements
will consist primarily of floor covering, air conditioning unit, and appliance
replacements. Additional capital improvements may be considered and will depend
on the physical condition of the property as well as the anticipated cash flow
generated by the property.
Patchen Place
During the three months ended March 31, 2003, the Partnership completed
approximately $27,000 of capital improvements at Patchen Place Apartments,
consisting primarily of floor covering, air conditioning unit, window, and
appliance replacements. These improvements were funded from operating cash flow.
The Partnership evaluates the capital improvement needs of the property during
the year and currently expects to complete an additional $217,000 in capital
improvements during the remainder of 2003. The additional capital improvements
will consist primarily of floor covering, appliance, and air conditioning unit
replacements and painting, balcony and soffit improvements. Additional capital
improvements may be considered and will depend on the physical condition of the
property as well as replacement reserves and the anticipated cash flow generated
by the property.
Northwoods I and II
During the three months ended March 31, 2003, the Partnership completed
approximately $30,000 of capital improvements at Northwoods I and II Apartments,
consisting primarily of floor covering, air conditioning unit, and appliance
replacements and structural improvements. These improvements were funded from
operating cash flow. The Partnership evaluates the capital improvement needs of
the property during the year and currently expects to complete an additional
$112,000 in capital improvements during the remainder of 2003. The additional
capital improvements will consist primarily of floor covering, appliance,
gutter, and roofing replacements and swimming pool upgrades. Additional capital
improvements may be considered and will depend on the physical condition of the
property as well as the anticipated cash flow generated by the property.
South Point
During the three months ended March 31, 2003, the Partnership completed
approximately $24,000 of capital improvements at South Point Apartments,
consisting primarily of floor covering and air conditioning unit replacements.
These improvements were funded from operating cash flow and replacement
reserves. The Partnership evaluates the capital improvement needs of the
property during the year and currently expects to complete an additional $40,000
in capital improvements during the remainder of 2003. The additional capital
improvements will consist primarily of floor covering, air conditioning unit,
and stairwell replacements. Additional capital improvements may be considered
and will depend on the physical condition of the property as well as replacement
reserves and the 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 Partnership's assets are thought to be sufficient for any near-term needs
(exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $23,530,000 has maturity dates ranging from
November 1, 2003 to December 1, 2021. The mortgage indebtedness of approximately
$15,930,000 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 plans to refinance the
indebtedness due to mature in 2003 and/or sell the properties prior to such
maturity dates. If the properties cannot be refinanced or sold for a sufficient
amount, the Partnership 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 three months ended
March 31, 2003 and 2002 (in thousands, except per unit data):
Three Months Per Limited Three Months Per Limited
Ended Partnership Ended Partnership
March 31, 2003 Unit March 31, 2002 Unit
Operations $ 329 $ 5.37 $ -- $ --
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 2003 or subsequent periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 41,649.67 limited partnership units
(the "Units") in the Partnership representing 68.82% of the outstanding units at
March 31, 2003. 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 68.82% 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 and
the Partnership fully reserves all balances outstanding over thirty days. 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 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 could have an
opportunity to discuss settlement. On October 30, 2002, the court entered an
order extending the stay in effect through January 10, 2003.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below. On April
4, 2003, the Court preliminarily approved the settlement and scheduled a hearing
on final approval for June 2, 2003.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Managing General Partner has also agreed to make
a tender offer to purchase all of the partnership interests in the Partnerships
within one year of final approval, if it is granted, and to provide partners
with the independent appraisals at the time of these tenders. The proposed
settlement also provides for the limitation of the allowable costs which the
Managing General Partner or its affiliates will charge the Partnerships in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation. On April 11, 2003, notice was distributed to limited
partners providing the details of the proposed 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. Before completing briefing on the appeal, the parties stayed
further proceedings in the appeal pending the Court's review of the terms of the
proposed settlement described above.
The Managing General Partner does not anticipate that any costs to the
Partnership, 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 Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K filed during the quarter ended March 31,
2003:
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: May 15, 2003
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: May 15, 2003
/s/Patrick J. Foye
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: May 15, 2003
/s/Paul J. McAuliffe
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 March 31, 2003
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: May 15, 2003
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: May 15, 2003
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.