10KSB 1 npi7.txt NPI7 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _________to _________ Commission file number 0-13454 NATIONAL PROPERTY INVESTORS 7 (Name of small business issuer in its charter) California 13-3230613 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 Issuer's telephone number Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Units of Limited Partnership Interest (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $2,865,000 State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests as of December 31, 2003. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE NONE 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. 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; litigation, including costs associated with prosecuting and defending claims and any adverse outcomes, 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. PART I Item 1. Description of Business National Property Investors 7 (the "Partnership" or "Registrant") is a California limited partnership formed in October 1983. The Partnership is engaged in the business of operating and holding real estate properties for investment. NPI Equity Investments, Inc., a Florida corporation, became the Partnership's managing general partner (the "Managing General Partner" or "NPI Equity") on December 20, 1991. The Managing General Partner was a subsidiary of National Property Investors, Inc. ("NPI") until December 31, 1996, at which time Insignia Properties Trust ("IPT") acquired the stock of NPI Equity. On October 1, 1998, IPT merged into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The partnership agreement provides that the Partnership is to terminate on December 31, 2008, unless terminated prior to such date. From February 1984 through February 1985, the Partnership offered 100,000 limited partnership units at $500 per unit for an aggregate of $50,000,000 and sold 60,517 units providing net proceeds of $30,259,000, pursuant to a Registration Statement filed with the Securities and Exchange Commission. Since its initial offering, the Partnership has not received, nor are limited partners required to make, additional capital contributions. The net proceeds of this offering were used to purchase seven income producing residential real estate properties. The Partnership's original property portfolio was geographically diversified with properties acquired in six states. One property was sold and another was foreclosed on in 1994. Three properties were sold in 2003. The Partnership continues to own and operate the remaining two properties (see "Item 2. Description of Properties"). The Partnership has no employees. The Managing General Partner is vested with full authority as to the general management and supervision of the business and affairs of the Partnership. The limited partners have no right to participate in the management or conduct of such business and affairs. An affiliate of the Managing General Partner provides day-to-day management services to the Partnership's investment properties. Risk Factors The real estate business in which the Partnership is engaged is highly competitive. There are other residential properties within the market area of the Partnership's properties. The number and quality of competitive properties, including those which may be managed by an affiliate of the Managing General Partner, in such market area could have a material effect on the rental market for the apartments at the Partnership's properties and the rents that may be charged for such apartments. While the Managing General Partner and its affiliates own and/or control a significant number of apartment units in the United States, such units represent an insignificant percentage of total apartment units in the United States and competition for the apartments is local. Laws benefiting disabled persons may result in the Partnership's incurrence of unanticipated expenses. Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to the Partnership's properties, or restrict renovations of the properties. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although the Managing General Partner believes that the Partnership's properties are substantially in compliance with present requirements, the Partnership may incur unanticipated expenses to comply with the ADA and the FHAA. Both the income and expenses of operating the properties owned by the Partnership are subject to factors outside of the Partnership's control, such as changes in the supply and demand for similar properties resulting from various market conditions, increases/decreases in unemployment or population shifts, changes in the availability of permanent mortgage financing, changes in zoning laws, or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential properties because such properties are susceptible to the impact of economic and other conditions outside of the control of the Partnership. There have been, and it is possible there may be other, Federal, state and local legislation and regulations enacted relating to the protection of the environment. The Partnership is unable to predict the extent, if any, to which such new legislation or regulations might occur and the degree to which such existing or new legislation or regulations might adversely affect the properties owned by the Partnership. The Partnership monitors its properties for evidence of pollutants, toxins and other dangerous substances, including the presence of asbestos. In certain cases environmental testing has been performed which resulted in no material adverse conditions or liabilities. In no case has the Partnership received notice that it is a potentially responsible party with respect to an environmental clean up site. A further description of the Partnership's business is included in "Management's Discussion and Analysis or Plan of Operation" included in "Item 6" of this Form 10-KSB. Item 2. Description of Properties The following table sets forth the Partnership's investment in properties: Date of Property Purchase Type of Ownership Use Fairway View II Apartments 11/84 Fee ownership subject Apartment Baton Rouge, Louisiana to first mortgage 204 units The Pines Apartments 04/85 Fee ownership subject Apartment Roanoke, Virginia to first mortgage 216 units On October 31, 2003, the Partnership sold Patchen Place Apartments to an unrelated third party for net proceeds of approximately $6,815,000 after payment of closing costs. The Partnership realized a gain of approximately $4,703,000 as a result of the sale. The Partnership used approximately $4,254,000 of the net proceeds to repay the mortgage encumbering the property. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $92,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $1,076,000 and $1,246,000, respectively, of revenue generated by the property. On December 9, 2003, the Partnership sold Northwoods Apartments to an unrelated third party for net proceeds of approximately $11,454,000 after payment of closing costs. The Partnership realized a gain of approximately $8,028,000 as a result of the sale. The buyer assumed the mortgage encumbering the property of approximately $6,611,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $207,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $2,010,000 and $2,177,000, respectively, of revenue generated by the property. On December 30, 2003, the Partnership sold South Point Apartments to an unrelated third party for net proceeds of approximately $8,135,000 after payment of closing costs. The Partnership realized a gain of approximately $4,973,000 as a result of the sale. The Partnership used approximately $4,948,000 of the net proceeds to repay the mortgage encumbering the property. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $105,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $1,262,000 and $1,357,000, respectively, of revenue generated by the property. Schedule of Properties Set forth below for each of the Partnership's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation, and Federal tax basis. Carrying Accumulated Federal Property Value Depreciation Rate Method Tax Basis (in thousands) (in thousands) Fairway View II $11,002 $ 7,155 5-30 yrs S/L $ 1,402 The Pines 8,744 6,570 5-30 yrs S/L 1,016 Total $19,746 $13,725 $ 2,418 See "Item 7. Financial Statements, Note A" for a description of the Partnership's capitalization and depreciation policies. Schedule of Property Indebtedness The following table sets forth certain information relating to the loans encumbering the Partnership's properties. Principal Principal Balance At Balance December 31, Interest Period Maturity Due At Property 2003 Rate Amortized Date Maturity (1) (in thousands) (in thousands) Fairway View II $ 5,163 7.03% 20 yrs 12/01/21 $ -- The Pines 3,830 7.97% 20 yrs 01/01/20 -- Total $ 8,993 $ -- (1) See "Item 7. Financial Statements - Note B" for information with respect to the Partnership's ability to prepay these loans and other specific details about the loans. On May 16, 2003, the Partnership refinanced the mortgage encumbering Patchen Place Apartments. The refinancing replaced the existing mortgage of $3,000,000 with a new mortgage in the amount of $4,290,000. Total capitalized loan costs were approximately $98,000 during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $7,000 during the year ended December 31, 2003, due to the write off of unamortized loan costs and debt discounts, which is included in (loss) income from discontinued operations. The new mortgage was repaid with the proceeds from the sale of Patchen Place Apartments in October 2003 (see "Item 7. Financial Statements - Note E"). On June 27, 2003, the Partnership refinanced the mortgage encumbering South Point Apartments. The refinancing replaced the existing mortgage of $4,600,000 with a new mortgage in the amount of $5,000,000. Total capitalized loan costs were approximately $115,000 during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $7,000 during the year ended December 31, 2003, due to the write off of unamortized loan costs and debt discounts, which is included in (loss) income from discontinued operations. The new mortgage was repaid with the proceeds from the sale of South Point Apartments in December 2003 (see "Item 7. Financial Statements - Note E"). Initially the May 16, 2003 refinancing of Patchen Place Apartments and the June 27, 2003 refinancing of South Point Apartments were under an interim credit facility ("Interim Credit Facility") which also provided for the refinancing of several other properties. The Interim Credit Facility created separate loans for each property refinanced thereunder, which loans were not cross-collateralized or cross-defaulted with each other. During the term of the Interim Credit Facility, Patchen Place and South Point Apartments were required to make interest-only payments. The first month's interest rate for Patchen Place Apartments was 2.78% and for South Point Apartments was 2.60%. As of July 1 and August 1, 2003, the loans on Patchen Place and South Point Apartments, respectively, were assumed by a different lender. The credit facility ("Permanent Credit Facility") with the new lender matures in September 2007 with an option for the Partnership to elect one five-year extension. This Permanent Credit Facility also created separate loans for each property refinanced thereunder, which loans are not cross-collateralized or cross-defaulted with each other. Each note under this Permanent Credit Facility is initially a variable rate loan, and after three years the Partnership has the option of converting the note to a fixed rate loan. The interest rate on the variable rate loans is 85 basis points over the Fannie Mae discounted mortgage-backed security index (1.92% per annum at December 31, 2003), and the rate resets monthly. Each loan automatically renews at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that the properties are on the Permanent Credit Facility. The loans were repaid when Patchen Place Apartments sold in October 2003 and South Point Apartments sold in December 2003. Rental Rates and Occupancy Average annual rental rates and occupancy for 2003 and 2002 for each property: Average Annual Average Rental Rates Occupancy (per unit) Property 2003 2002 2003 2002 Fairway View II (1) $7,193 $7,098 90% 94% The Pines 7,231 7,252 92% 94% (1) The Managing General Partner attributes the decrease in occupancy at Fairway View II to strong competition from new construction in the local market area. As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties of the Partnership are subject to competition from other residential apartment complexes in the area. The Managing General Partner believes that all of the properties are adequately insured. Each property is an apartment complex which leases units for lease terms of one year or less. No residential tenant leases 10% or more of the available rental space. All of the properties are in good physical condition, subject to normal depreciation and deterioration as is typical for assets of this type and age. Real Estate Taxes and Rates Real estate taxes and rates in 2003 for each property were: 2003 2003 Taxes Rates (in thousands) Fairway View II $ 47 10.40% The Pines 79 1.12% Capital Improvements Fairway View II During the year ended December 31, 2003, the Partnership completed approximately $66,000 of capital improvements at Fairway View II, consisting primarily of roof and plumbing fixture upgrades and floor covering and air conditioning unit replacements. These improvements were funded from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and currently expects to budget approximately $112,000. Additional improvements may be considered during 2004 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 year ended December 31, 2003, the Partnership completed approximately $52,000 of capital improvements at The Pines, consisting primarily of water heater, air conditioning unit, office computer, cabinet and floor covering replacements. These improvements were funded from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and currently expects to budget approximately $119,000. Additional improvements may be considered during 2004 and will depend on the physical condition of the property, as well as anticipated cash flow generated by the property. Patchen Place During the year ended December 31, 2003, the Partnership completed approximately $202,000 of capital improvements at Patchen Place, consisting primarily of roof upgrades and floor covering, air conditioning unit, water heater, and appliance replacements. These improvements were funded from operating cash flow, insurance proceeds, and replacement reserves. Patchen Place was sold in October 2003. Northwoods I and II During the year ended December 31, 2003, the Partnership completed approximately $117,000 of capital improvements at Northwoods I and II, consisting primarily of floor covering, air conditioning unit, and appliance replacements and structural improvements. These improvements were funded from operating cash flow. Northwoods I and II was sold in December 2003. South Point During the year ended December 31, 2003, the Partnership completed approximately $109,000 of capital improvements at South Point, consisting primarily of floor covering and air conditioning unit replacements. These improvements were funded from operating cash flow and replacement reserves. South Point was sold in December 2003. Item 3. 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 purported to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) that 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 that 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 sought monetary damages and equitable relief, including judicial dissolution of the Partnership. In addition, 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 Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty, unfair competition, conversion, unjust enrichment, and judicial dissolution. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action. 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 at least one round of tender offers 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 provided 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. On June 13, 2003, the Court granted final approval of the settlement and entered judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector ("Objector") filed an appeal seeking to vacate and/or reverse the order approving the settlement and entering judgment thereto. On November 24, 2003, the Objector filed an application requesting the Court order AIMCO to withdraw settlement tender offers it had commenced, refrain from making further offers pending the appeal and auction any units tendered to third parties, contending that the offers did not conform with the terms of the Settlement. Counsel for the Objector (on behalf of another investor) had alternatively requested the Court take certain action purportedly to enforce the terms of the settlement agreement. On December 18, 2003, the Court heard oral argument on the motions and denied them both in their entirety. On January 28, 2004, Objector filed his opening brief in his pending appeal. The Managing General Partner is currently scheduled to file a brief in support of the order approving settlement and entering judgment thereto by April 23, 2004. On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General Partner, was served with a Complaint in the United States District Court, District of Columbia alleging that AIMCO Properties L.P. willfully violated the Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. The Complaint is styled as a Collective Action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties L.P. failed to compensate maintenance workers for time that they were required to be "on-call". Additionally, the Complaint alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call". The Complaint also attempts to certify a subclass for salaried service directors who are challenging their classification as exempt from the overtime provisions of the FLSA. AIMCO Properties L.P. has filed an answer to the Complaint denying the substantive allegations. Discovery is currently underway. 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 4. Submission of Matters to a Vote of Security Holders During the quarter ended December 31, 2003, no matter was submitted to the vote of the unit holders through the solicitation of proxies or otherwise. PART II Item 5. Market for the Partnership's Equity and Related Partner Matters The Partnership, a publicly-held limited partnership, offered up to 100,000 limited partnership units (the "Units") and sold 60,517 limited partnership units aggregating $30,259,000. At December 31, 2003, the Partnership had 1,112 holders of record owning an aggregate of 60,517 Units. Affiliates of the Managing General Partner owned 41,649.67 Units or 68.82% at December 31, 2003. No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. The Partnership distributed the following amounts during the years ended December 31, 2003 and 2002 (in thousands, except per unit data): Per Limited Per Limited Year Ended Partnership Year Ended Partnership December 31, Unit December 31, 2002 Unit 2003 Operations $ 1,217 $ 19.90 $ 1,584 $ 25.91 Refinancing (1) 1,347 22.04 242 3.97 Sales proceeds (2) 7,340 120.08 -- -- $ 9,904 $162.02 $ 1,826 $ 29.88 (1) For 2003, distributions from the refinancings of Patchen Place Apartments in May 2003 and South Point Apartments in June 2003. For 2002, distribution from the remaining proceeds from the refinancing of Fairway View II Apartments in November 2001. (2) Proceeds from the sale of Patchen Place Apartments in October 2003 and the sale of Northwoods I and II Apartments in December 2003. Subsequent to December 31, 2003, approximately $2,624,000 (approximately $2,598,000 to the limited partners or $42.93 per limited partnership unit) was distributed to the partners related to the sale of South Point Apartments in December 2003. 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 in 2004 or subsequent periods. See "Item 2. Description of Properties - Capital Improvements" for information relating to anticipated capital expenditures at the properties. In addition to its indirect ownership of the Managing 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 December 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 in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unit holders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, 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 and its affiliates are in a position to influence all such voting decisions with respect to the Partnership. However, DeForest Ventures II L.P., from whom Insignia Properties LP ("IPLP") an affiliate of the Managing General Partner and of AIMCO acquired 25,399 Units (41.97% of the units), 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 its affiliates; and (ii) on all other matters submitted by it or its affiliates, in proportion to the votes cast by third party unit holders. Except for the foregoing, no other limitations are imposed on IPLP's, AIMCO's or any other affiliates right to vote each unit held. 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. Item 6. Management's Discussion and Analysis or Plan of Operation This item should be read in conjunction with the financial statements and other items contained elsewhere in this report. Results of Operations The Partnership's net income for the years ended December 31, 2003 and 2002 was approximately $17,225,000 and $74,000, respectively. The increase in net income for the year ended December 31, 2003 is due to the recognition of the gain on the sales of Patchen Place, Northwoods I and II and South Point Apartments in 2003. Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which established standards for the way that public business enterprises report information about long-lived assets that are either being held for sale or have already been disposed of by sale or other means. The standard requires that results of operations for a long-lived asset that is being held for sale or has already been disposed of be reported as a discontinued operation on the statement of operations. As a result, the accompanying statements of operations have been restated as of January 1, 2002 to reflect the operations of Patchen Place, Northwoods I and II and South Point Apartments as (loss) income from discontinued operations due to the sale of these properties during 2003. On October 31, 2003, the Partnership sold Patchen Place Apartments to an unrelated third party for net proceeds of approximately $6,815,000 after payment of closing costs. The Partnership realized a gain of approximately $4,703,000 as a result of the sale. The Partnership used approximately $4,254,000 of the net proceeds to repay the mortgage encumbering the property. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $92,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $1,076,000 and $1,246,000, respectively, of revenue generated by the property. On December 9, 2003, the Partnership sold Northwoods Apartments to an unrelated third party for net proceeds of approximately $11,454,000 after payment of closing costs. The Partnership realized a gain of approximately $8,028,000 as a result of the sale. The buyer assumed the mortgage encumbering the property of approximately $6,611,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $207,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $2,010,000 and $2,177,000, respectively, of revenue generated by the property. On December 30, 2003, the Partnership sold South Point Apartments to an unrelated third party for net proceeds of approximately $8,135,000 after payment of closing costs. The Partnership realized a gain of approximately $4,973,000 as a result of the sale. The Partnership used approximately $4,948,000 of the net proceeds to repay the mortgage encumbering the property. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $105,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $1,262,000 and $1,357,000, respectively, of revenue generated by the property. On February 15, 2003, Patchen Place Apartments incurred damages to its buildings and landscaping as a result of an ice storm. As a result of the damage, approximately $40,000 of fixed assets and $35,000 of accumulated depreciation were written off resulting in a net write off of approximately $5,000. The Partnership received approximately $59,000 in proceeds from the insurance company to repair the damaged units. For financial statement purposes, a casualty gain of approximately $54,000 was recognized during the year ended December 31, 2003 as a result of the difference between the proceeds received and the net book value of the assets written off. This amount is included in (loss) income from discontinued operations. Excluding the gain on sales and the discontinued operations, the Partnership's loss from continuing operations for the years ended December 31, 2003 and 2002 was approximately $300,000 and $200,000 respectively. The increase in loss from continuing operations for the year ended December 31, 2003 is due to a decrease in total revenue. Total revenue decreased due to a decrease in rental income caused by a decrease in occupancy and an increase in concessions at both of the investment properties. Total expenses remained constant for 2003. Included in general and administrative expenses for the years ended December 31, 2003 and 2002 are management reimbursements to the Managing General Partner as allowed under the Partnership Agreement. Also included in general and administrative expenses are costs associated with the quarterly and annual 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 Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, the Managing General Partner may use rental concessions and rental rate reductions to offset softening market conditions, accordingly, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Liquidity and Capital Resources At December 31, 2003, the Partnership had cash and cash equivalents of approximately $3,628,000 compared to approximately $614,000 at December 31, 2002. The increase in cash and cash equivalents of approximately $3,014,000 is due to approximately $26,264,000 and $1,509,000 of cash provided by investing and operating activities, respectively, partially offset by approximately $24,759,000 of cash used in financing activities. Cash provided by investing activities consisted of proceeds from the sales of Patchen Place, Northwoods I and II and South Point Apartments, net withdrawals from restricted escrows maintained by the mortgage lender, and insurance proceeds received at Patchen Place Apartments, partially offset by property improvements and replacements. Cash used in financing activities consisted of the repayment of the mortgages encumbering Patchen Place, Northwoods I and II and South Point Apartments, payment of loan costs, principal payments on the mortgages encumbering the investment properties, and distributions to partners, offset by proceeds from mortgage notes payable due to the refinancings of Patchen Place and South Point Apartments. The Partnership invests its working capital reserves in interest bearing accounts. 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. The Partnership is currently evaluating the capital improvement needs of the properties for the upcoming year and currently expects to budget approximately $231,000 for both of the Partnership's investment properties. Additional improvements may be considered during 2004 and will depend on the physical condition of the properties as well as replacement reserves and anticipated cash flow generated by the properties. The additional capital expenditures 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 May 16, 2003, the Partnership refinanced the mortgage encumbering Patchen Place Apartments. The refinancing replaced the existing mortgage of $3,000,000 with a new mortgage in the amount of $4,290,000. Total capitalized loan costs were approximately $98,000 during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $7,000 during the year ended December 31, 2003, due to the write off of unamortized loan costs and debt discounts, which is included in (loss) income from discontinued operations. The new mortgage was repaid with the proceeds from the sale of Patchen Place Apartments in October 2003. On June 27, 2003, the Partnership refinanced the mortgage encumbering South Point Apartments. The refinancing replaced the existing mortgage of $4,600,000 with a new mortgage in the amount of $5,000,000. Total capitalized loan costs were approximately $115,000 during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $7,000 during the year ended December 31, 2003, due to the write off of unamortized loan costs and debt discounts, which is included in (loss) income from discontinued operations. The new mortgage was repaid with the proceeds from the sale of South Point Apartments in December 2003. Initially the May 16, 2003 refinancing of Patchen Place Apartments and the June 27, 2003 refinancing of South Point Apartments were under an interim credit facility ("Interim Credit Facility") which also provided for the refinancing of several other properties. The Interim Credit Facility created separate loans for each property refinanced thereunder, which loans were not cross-collateralized or cross-defaulted with each other. During the term of the Interim Credit Facility, Patchen Place and South Point Apartments were required to make interest-only payments. The first month's interest rate for Patchen Place Apartments was 2.78% and for South Point Apartments was 2.60%. As of July 1 and August 1, 2003, the loans on Patchen Place and South Point Apartments, respectively, were assumed by a different lender. The credit facility ("Permanent Credit Facility") with the new lender matures in September 2007 with an option for the Partnership to elect one five-year extension. This Permanent Credit Facility also created separate loans for each property refinanced thereunder, which loans are not cross-collateralized or cross-defaulted with each other. Each note under this Permanent Credit Facility is initially a variable rate loan, and after three years the Partnership has the option of converting the note to a fixed rate loan. The interest rate on the variable rate loans is 85 basis points over the Fannie Mae discounted mortgage-backed security index (1.92% per annum at December 31, 2003), and the rate resets monthly. Each loan automatically renews at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that the properties are on the Permanent Credit Facility. The loans were repaid when Patchen Place Apartments sold in October 2003 and South Point Apartments sold in December 2003. The Partnership's assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Partnership. The mortgage indebtedness encumbering the investment properties of approximately $8,993,000 has maturity dates of January 1, 2020 and December 1, 2021 at which time the loans are scheduled to be fully amortized. 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 years ended December 31, 2003 and 2002 (in thousands, except per unit data): Per Limited Per Limited Year Ended Partnership Year Ended Partnership December 31, Unit December 31, 2002 Unit 2003 Operations $ 1,217 $ 19.90 $ 1,584 $ 25.91 Refinancing (1) 1,347 22.04 242 3.97 Sales proceeds (2) 7,340 120.08 -- -- $ 9,904 $162.02 $ 1,826 $ 29.88 (1) For 2003, distributions from the refinancings of Patchen Place Apartments in May 2003 and South Point Apartments in June 2003. For 2002, distribution from the remaining proceeds from the refinancing of Fairway View II Apartments in November 2001. (2) Proceeds from the sale of Patchen Place Apartments in October 2003 and the sale of Northwoods I and II Apartments in December 2003. Subsequent to December 31, 2003, approximately $2,624,000 (approximately $2,598,000 to the limited partners or $42.93 per limited partnership unit) was distributed to the partners related to the sale of South Point Apartments in December 2003. 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 in 2004 or subsequent periods. Other In addition to its indirect ownership of the Managing 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 December 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 in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unit holders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, 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 and its affiliates are in a position to influence all such voting decisions with respect to the Partnership. However, DeForest Ventures II L.P., from whom Insignia Properties LP ("IPLP") an affiliate of the Managing General Partner and of AIMCO acquired 25,399 Units (41.97% of the units), 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 its affiliates; and (ii) on all other matters submitted by it or its affiliates, in proportion to the votes cast by third party unit holders. Except for the foregoing, no other limitations are imposed on IPLP's, AIMCO's or any other affiliates right to vote each unit held. 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. Critical Accounting Policies and Estimates A summary of the Partnership's significant accounting policies is included in "Note A - Organization and Significant Accounting Policies" which is included in the financial statements in "Item 7. Financial Statements". The Managing General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the financial statements with useful and reliable information about the Partnership's operating results and financial condition. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Partnership's accounting policies in many areas. 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, but are not limited to, 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 impairment of 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 evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Any concessions given at the inception of the lease are amortized over the life of the lease. ITEM 7. FINANCIAL STATEMENTS NATIONAL PROPERTY INVESTORS 7 LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Balance Sheet - December 31, 2003 Statements of Operations - Years ended December 31, 2003 and 2002 Statements of Changes in Partners' (Deficiency) Capital - Years ended December 31, 2003 and 2002 Statements of Cash Flows - Years ended December 31, 2003 and 2002 Notes to Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners National Property Investors 7 We have audited the accompanying balance sheet of National Property Investors 7 as of December 31, 2003, and the related statements of operations, changes in partners' (deficiency) capital, and cash flows for each of the two years in the period ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Partnership's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Property Investors 7 at December 31, 2003, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. /s/ERNST & YOUNG LLP Greenville, South Carolina February 27, 2004 NATIONAL PROPERTY INVESTORS 7 BALANCE SHEET (in thousands, except unit data) December 31, 2003 Assets Cash and cash equivalents $ 3,628 Receivables and deposits 373 Restricted escrows 269 Other assets 305 Investment properties (Notes B, E and F): Land $ 1,678 Buildings and related personal property 18,068 19,746 Less accumulated depreciation (13,725) 6,021 $ 10,596 Liabilities and Partners' (Deficiency) Capital Liabilities Accounts payable $ 235 Tenant security deposit liabilities 35 Other liabilities 372 Mortgage notes payable (Note B) 8,993 Due to affiliates (Note D) 72 Partners' (Deficiency) Capital General partner $ (293) Limited partners (60,517 units issued and outstanding) 1,182 889 $ 10,596 See Accompanying Notes to Financial Statements NATIONAL PROPERTY INVESTORS 7 STATEMENTS OF OPERATIONS (in thousands, except per unit data) Years Ended December 31, 2003 2002 (Restated) Revenues: Rental income $ 2,667 $ 2,781 Other income 198 184 Total revenues 2,865 2,965 Expenses: Operating 1,162 1,142 General and administrative 432 425 Depreciation 758 758 Interest 692 704 Property taxes 121 136 Total expenses 3,165 3,165 Net loss from continuing operations (300) (200) Net (loss) income from discontinued operations (179) 274 Gain on sale of discontinued operations (Note E) 17,704 -- Net income (Note C) $17,225 $ 74 Net income allocated to general partner (1%) $ 172 $ 1 Net income allocated to limited partners (99%) 17,053 73 $17,225 $ 74 Net income per limited partnership unit: Loss from continuing operations $ (4.91) $ (3.27) (Loss) income from discontinued operations (Note E) (2.92) 4.48 Gain on sale of discontinued operations 289.62 -- $281.79 $ 1.21 Distribution per limited partnership unit $162.02 $ 29.88 See Accompanying Notes to Financial Statements NATIONAL PROPERTY INVESTORS 7 STATEMENTS OF CHANGES IN PARTNERS' (DEFICIENCY) CAPITAL (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 -- (18) (1,808) (1,826) Net income for the year ended December 31, 2002 -- 1 73 74 Partners' deficit at December 31, 2002 60,517 (366) (6,066) (6,432) Distributions to partners -- (99) (9,805) (9,904) Net income for the year ended December 31, 2003 -- 172 17,053 17,225 Partners' (deficiency) capital at December 31, 2003 60,517 $ (293) $ 1,182 $ 889 See Accompanying Notes to Financial Statements NATIONAL PROPERTY INVESTORS 7 STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2003 2002 Cash flows from operating activities: Net income $17,225 $ 74 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,953 2,085 Amortization of loan costs 70 68 Casualty gain (54) -- Loss on early extinguishment of debt 418 -- Gain on sale of investment property (17,704) -- Change in accounts: Receivables and deposits (148) 204 Other assets 8 35 Accounts payable (142) (32) Tenant security deposit liabilities (97) 24 Accrued property taxes 1 -- Other liabilities (93) 200 Due to affiliates 72 -- Net cash provided by operating activities 1,509 2,658 Cash flows from investing activities: Property improvements and replacements (546) (651) Net withdrawals from (deposits to) restricted 347 (77) escrows Insurance proceeds received 59 -- Net proceeds from sale of discontinued operations 26,404 -- Net cash provided by (used in) investing 26,264 (728) activities Cash flows from financing activities: Payments on mortgage notes payable (519) (402) Repayment of mortgage notes payable (23,413) -- Proceeds from mortgage notes payable 9,290 -- Loan costs paid (213) -- Distributions to partners (9,904) (1,826) Net cash used in financing activities (24,759) (2,228) Net increase (decrease) in cash and cash equivalents 3,014 (298) Cash and cash equivalents at beginning of year 614 912 Cash and cash equivalents at end of year $ 3,628 $ 614 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,580 $ 1,739 See Accompanying Notes to Financial Statements NATIONAL PROPERTY INVESTORS 7 NOTES TO FINANCIAL STATEMENTS December 31, 2003 Note A - Organization and Significant Accounting Policies Organization: National Property Investors 7 (the "Partnership" or "Registrant") is a California limited partnership organized in October 1983 to acquire and operate residential apartment complexes. The Partnership's managing general partner is NPI Equity Investments, Inc. ("NPI Equity" or the "Managing General Partner"). NPI Equity was a wholly owned subsidiary of Insignia Properties Trust ("IPT"). On February 26, 1999, IPT was merged into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The Partnership Agreement provides that the Partnership will terminate on December 31, 2008, unless terminated prior to such date. As of December 31, 2003, the Partnership operates two residential apartment complexes located in the southeastern United States. Basis of Presentation: Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which established standards for the way that public business enterprises report information about long-lived assets that are either being held for sale or have already been disposed of by sale or other means. The standard requires that results of operations for a long-lived asset that is being held for sale or has already been disposed of be reported as a discontinued operation on the statement of operations. As a result, the accompanying statements of operations have been restated as of January 1, 2002 to reflect the operations of Patchen Place, Northwoods I & II and South Point Apartments as (loss) income from discontinued operations due to their sales in 2003. Allocation of Profits, Gains, and Losses: Profits, gains, and losses of the Partnership are allocated between the general and limited partners in accordance with the provisions of the Partnership Agreement. Profits, not including gains from property dispositions, are allocated as if they were distributions of net cash from operations. Any gain from property dispositions attributable to the excess, if any, of the indebtedness relating to a property immediately prior to the disposition of such property over the Partnership's adjusted basis in the property shall be allocated to each partner having a negative capital account balance, to the extent of such negative balance. The balance of any gain shall be treated on a cumulative basis as if it constituted an equivalent amount of distributable net proceeds and shall be allocated to the general partner to the extent that the general partner would have received distributable net proceeds in connection therewith; the balance shall be allocated to the limited partners. However, the interest of the general partner will be equal to at least 1% of each gain at all times during the existence of the Partnership. All losses, including losses attributable to property dispositions, are allocated 99% to the limited partners and 1% to the general partner. Accordingly, net income as shown in the statements of operations and changes in partner's (deficiency) capital for 2003 and 2002 was allocated 99% to the limited partners and 1% to the general partner. Net income per limited partnership unit for each such year was computed as 99% of net income divided by 60,517 units outstanding. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $3,425,000 at December 31, 2003 that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts. Leases: The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases. The Partnership evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants. In addition, the Managing General Partner's policy is to offer rental concessions during periods of declining occupancy or in response to heavy competition from other similar complexes in the area. Any concessions given at the inception of the lease are amortized over the life of the lease. Tenant Security Deposits: The Partnership requires security deposits from lessees for the duration of the lease and such deposits are included in receivables and deposits. Deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on its rental payments. Restricted Escrows: Capital Reserve: At the time of the refinancing of the mortgage encumbering Fairway View II Apartments during 2001, approximately $179,000 of the proceeds were designated for certain capital improvements. At December 31, 2003, the escrow balance is approximately $181,000. Replacement Reserve: A replacement reserve account was maintained for Patchen Place and South Point Apartments. Each property had a required monthly payment into its account to cover the costs of capital improvements and replacements. The balance in the Patchen Place reserve was returned to the Partnership subsequent to the property's sale in October 2003 (see "Note E"). The balance in the South Point account at December 31, 2003 is approximately $88,000. This amount was returned to the Partnership subsequent to year end due to the sale of the property in December 2003. Loan Costs: Loan costs of approximately $292,000, less accumulated amortization of approximately $41,000, are included in other assets and are being amortized over the lives of the related loans. Amortization expense for the years ended December 31, 2003 and 2002 was $70,000 and $68,000, respectively. Amortization expense is expected to be $14,000 for the years 2004 through 2008. Investment Properties: Investment properties consist of two apartment complexes and are stated at cost. Acquisition fees are capitalized as a cost of real estate. Expenditures in excess of $250 that maintain an existing asset which has a useful life of more than one year are capitalized as capital replacement expenditures and depreciated over the estimated useful life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. No adjustments for impairment of value were recorded in the years ended December 31, 2003 or 2002. Depreciation: Depreciation is provided by the straight-line method over the estimated lives of the apartment properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used for real property over 18 years for additions after March 15, 1984 and before May 9, 1985, and 19 years for additions after May 8, 1985, and before January 1, 1987. As a result of the Tax Reform Act of 1986, for additions after December 31, 1986, the modified accelerated cost recovery method is used for depreciation of (1) real property over 27 1/2 years and (2) personal property additions over 5 years. Fair Value of Financial Statements: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amounts of its financial instruments (except for long term debt) approximate their fair values due to the short term maturity of these instruments. The fair value of the Partnership's long term debt at the Partnership's incremental borrowing rate is approximately $9,493,000. Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS No. 131, the Partnership has only one reportable segment. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Advertising: The Partnership expenses the costs of advertising as incurred. Advertising costs of approximately $132,000 and $99,000 for the years ended December 31, 2003 and 2002, respectively, are included in operating expense and (loss) income from discontinued operations. Note B - Mortgage Notes Payable Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 2003 Interest Rate Date Maturity (in thousands) (in thousands) Fairway View II $ 5,163 $ 42 7.03% 12/01/21 $ -- The Pines 3,830 35 7.97% 01/01/20 -- Total $ 8,993 $ 77 $ -- On May 16, 2003, the Partnership refinanced the mortgage encumbering Patchen Place Apartments. The refinancing replaced the existing mortgage of $3,000,000 with a new mortgage in the amount of $4,290,000. Total capitalized loan costs were approximately $98,000 during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $7,000 during the year ended December 31, 2003, due to the write off of unamortized loan costs and debt discounts, which is included in (loss) income from discontinued operations. The new mortgage was repaid with the proceeds from the sale of Patchen Place Apartments in October 2003 (see "Note E"). On June 27, 2003, the Partnership refinanced the mortgage encumbering South Point Apartments. The refinancing replaced the existing mortgage of $4,600,000 with a new mortgage in the amount of $5,000,000. Total capitalized loan costs were approximately $115,000 during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $7,000 during the year ended December 31, 2003, due to the write off of unamortized loan costs and debt discounts, which is included in (loss) income from discontinued operations. The new mortgage was repaid with the proceeds from the sale of South Point Apartments in December 2003 (see "Note E"). Initially the May 16, 2003 refinancing of Patchen Place Apartments and the June 27, 2003 refinancing of South Point Apartments were under an interim credit facility ("Interim Credit Facility") which also provided for the refinancing of several other properties. The Interim Credit Facility created separate loans for each property refinanced thereunder, which loans were not cross-collateralized or cross-defaulted with each other. During the term of the Interim Credit Facility, Patchen Place and South Point Apartments were required to make interest-only payments. The first month's interest rate for Patchen Place Apartments was 2.78% and for South Point Apartments was 2.60%. As of July 1 and August 1, 2003, the loans on Patchen Place and South Point Apartments, respectively, were assumed by a different lender. The credit facility ("Permanent Credit Facility") with the new lender matures in September 2007 with an option for the Partnership to elect one five-year extension. This Permanent Credit Facility also created separate loans for each property refinanced thereunder, which loans are not cross-collateralized or cross-defaulted with each other. Each note under this Permanent Credit Facility is initially a variable rate loan, and after three years the Partnership has the option of converting the note to a fixed rate loan. The interest rate on the variable rate loans is 85 basis points over the Fannie Mae discounted mortgage-backed security index (1.92% per annum at December 31, 2003), and the rate resets monthly. Each loan automatically renews at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that the properties are on the Permanent Credit Facility. The loans were repaid when Patchen Place Apartments sold in October 2003 and South Point Apartments sold in December 2003. The mortgage notes payable are non-recourse and are secured by pledge of the respective apartment properties and by pledge of revenues from the respective apartment properties. The notes require prepayment penalties if repaid prior to maturity and prohibit resale of the properties subject to existing indebtedness. Scheduled principal payments of the mortgage notes payable subsequent to December 31, 2003 are as follows (in thousands): 2004 $ 271 2005 291 2006 314 2007 338 2008 364 Thereafter 7,415 Total $ 8,993 Note C - Income Taxes The Partnership has received a ruling from the Internal Revenue Service that it will be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net income and Federal taxable income (in thousands, except per unit data): 2003 2002 Net income as reported $17,225 $ 74 Add (deduct): Depreciation differences 811 155 Prepaid rent (53) -- Gain on sale 4,173 -- Other (27) 135 Federal taxable income $22,129 $ 364 Federal taxable income per limited partnership unit $362.01 $ 5.95 The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets and liabilities (in thousands): 2003 Net assets as reported $ 889 Land and buildings (592) Accumulated depreciation (3,011) Syndication and distribution costs 3,555 Prepaid rent 161 Other 431 Net assets - Federal tax basis $ 1,433 Note D - 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 years ended December 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 $339,000 and $373,000 for the years ended December 31, 2003 and 2002, respectively, which is included in operating expenses and (loss) income from discontinued operations. An affiliate of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $270,000 and $254,000 for the years ended December 31, 2003 and 2002, respectively, which are included in general and administrative expenses 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 $15,000 and $26,000 for the years ended December 31, 2003 and 2002, respectively. The construction management service fees are calculated based on a percentage of current year additions to investment properties. At December 31, 2003, approximately $30,000 in reimbursement was due to the Managing General Partner and was included in Due to affiliates on the accompanying balance sheet. 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 $62,000 and $91,000 in such reimbursements for the years ended December 31, 2003 and 2002, respectively, 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 earned approximately $53,000 and $33,000 for such fees during the years ended December 31, 2003 and 2002, respectively, which is included in general and administrative expenses. Upon the sale of the Partnership's properties, NPI Equity will be entitled to an incentive compensation fee equal to a declining percentage of the difference between the total amount distributed to limited partners and the appraised value of their investment at February 1, 1992. The percentage amount to be realized by NPI Equity, if any, will be dependent upon the year in which the property is sold. Payment of the incentive compensation fee is subordinated to the receipt by the limited partners, of: (a) distributions from capital transaction proceeds of an amount equal to their appraised investment in the Partnership at February 1, 1992; and (b) distributions from all sources (capital transactions as well as cash flow) of an amount equal to six percent (6%) per annum cumulative, non-compounded, on their present appraised investment in the Partnership at February 1, 1992. During the year ended December 31, 2003, these preferences were met and the Managing General Partner was entitled to approximately $180,000 related to the sales of Northwoods I & II and South Point Apartments. At December 31, 2003, approximately $42,000 related to the sale of South Point Apartments was due to the Managing General Partner and was included in Due to affiliates. An affiliate of the Managing General Partner earned approximately $93,000 for services related to the refinancings of Patchen Place and South Point Apartment during the year ended December 31, 2003. These costs were capitalized at the time of the refinancings and subsequently written off when the properties were sold later in 2003 (see "Note E"). NPI Equity, on behalf of the Partnership and certain affiliated partnerships, has established a revolving credit facility (the "Partnership Revolver") to be used to fund deferred maintenance and working capital needs of the Partnership and certain other affiliated partnerships in the National Property Investors Partnership Series. The maximum draw available to the Partnership under the Partnership Revolver is $500,000. Loans under the Partnership Revolver will have a term of 365 days, be unsecured and bear interest at the prime rate plus 2% per annum. The maturity date of any such borrowing accelerates in the event of: (i) the removal of NPI Equity as the managing general partner (whether or not for cause); (ii) the sale or refinancing of a property by the Partnership (whether or not a borrowing under the Partnership Revolver was made with respect to such property); or (iii) the liquidation of the Partnership. At December 31, 2003, the Partnership had no outstanding amounts due under this Partnership Revolver. 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 the years ended December 31, 2003 and 2002, the Partnership was charged by AIMCO and its affiliates approximately $92,000 and $78,000, respectively, for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the Managing 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 December 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 in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unit holders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, 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 and its affiliates are in a position to influence all such voting decisions with respect to the Partnership. However, DeForest Ventures II L.P., from whom Insignia Properties LP ("IPLP") an affiliate of the Managing General Partner and of AIMCO acquired 25,399 Units (41.97% of the units), 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 its affiliates; and (ii) on all other matters submitted by it or its affiliates, in proportion to the votes cast by third party unit holders. Except for the foregoing, no other limitations are imposed on IPLP's, AIMCO's or any other affiliates right to vote each unit held. 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. Note E - Sale of Discontinued Operations On October 31, 2003, the Partnership sold Patchen Place Apartments to an unrelated third party for net proceeds of approximately $6,815,000 after payment of closing costs. The Partnership realized a gain of approximately $4,703,000 as a result of the sale. The Partnership used approximately $4,254,000 of the net proceeds to repay the mortgage encumbering the property. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $92,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $1,076,000 and $1,246,000, respectively, of revenue generated by the property. On December 9, 2003, the Partnership sold Northwoods Apartments to an unrelated third party for net proceeds of approximately $11,454,000 after payment of closing costs. The Partnership realized a gain of approximately $8,028,000 as a result of the sale. The buyer assumed the mortgage encumbering the property of approximately $6,611,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $207,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $2,010,000 and $2,177,000, respectively, of revenue generated by the property. On December 30, 2003, the Partnership sold South Point Apartments to an unrelated third party for net proceeds of approximately $8,135,000 after payment of closing costs. The Partnership realized a gain of approximately $4,973,000 as a result of the sale. The Partnership used approximately $4,948,000 of the net proceeds to repay the mortgage encumbering the property. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $105,000 as a result of unamortized loan costs being written off. This amount is included in (loss) income from discontinued operations. Included in (loss) income from discontinued operations for the years ended December 31, 2003 and 2002 is approximately $1,262,000 and $1,357,000, respectively, of revenue generated by the property. Subsequent to December 31, 2003, approximately $2,624,000 was distributed to the partners related to the sale of South Point Apartments in December 2003. Note F - Real Estate and Accumulated Depreciation Initial Cost To Partnership (in thousands) Buildings Cost and Related Capitalized Personal Subsequent to Description Encumbrances Land Property Acquisition (in thousands) (in thousands) Fairway View II $ 5,163 $ 1,086 $ 8,788 $ 1,128 The Pines 3,830 579 6,521 1,644 Totals $ 8,993 $ 1,665 $15,309 $ 2,772
Gross Amount at Which Carried At December 31, 2003 (in thousands) Buildings And Related Personal Accumulated Year of Date Depreciable Description Land Property Total Depreciation Construction Acquired Life-Years (in thousands) Fairway View II $1,094 $ 9,908 $11,002 $ 7,155 1981 11/84 5-30 The Pines 584 8,160 8,744 6,570 1978 04/85 5-30 Total $1,678 $18,068 $19,746 $13,725
Reconciliation of "real estate and accumulated depreciation": Years Ended December 31, 2003 2002 (in thousands) Investment Properties Balance at beginning of year $ 49,491 $ 48,840 Property improvements 546 651 Property dispositions from casualty (40) -- Property dispositions from sales (30,251) -- Balance at end of year $ 19,746 $ 49,491 Accumulated Depreciation Balance at beginning of year $ 33,658 $ 31,573 Additions charged to expense 1,953 2,085 Property dispositions from casualty (35) -- Property dispositions from sales (21,851) -- Balance at end of year $ 13,725 $ 33,658 The aggregate cost of the real estate for Federal income tax purposes at December 31, 2003 and 2002, is approximately $19,154,000 and $47,942,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 2003 and 2002, is approximately $16,736,000 and $40,360,000, respectively. Note G - Casualty Gain On February 15, 2003 an ice storm caused damage to exterior sections on some of the buildings and to the landscaping at Patchen Place Apartments. No actual units were damaged during the storm. As a result of the damage, approximately $40,000 of fixed assets and $35,000 of accumulated depreciation were written off resulting in a net write off of approximately $5,000. The Partnership received approximately $59,000 in proceeds from the insurance company to repair the damaged units. For financial statement purposes, a casualty gain of approximately $54,000 was recognized during the year ended December 31, 2003 as a result of the difference between the proceeds received and the net book value of the assets written off. This amount is included in (loss) income from discontinued operations. Note H - 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 purported to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) that 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 that 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 sought monetary damages and equitable relief, including judicial dissolution of the Partnership. In addition, 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 Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty, unfair competition, conversion, unjust enrichment, and judicial dissolution. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action. 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 at least one round of tender offers 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 provided 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. On June 13, 2003, the Court granted final approval of the settlement and entered judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector ("Objector") filed an appeal seeking to vacate and/or reverse the order approving the settlement and entering judgment thereto. On November 24, 2003, the Objector filed an application requesting the Court order AIMCO to withdraw settlement tender offers it had commenced, refrain from making further offers pending the appeal and auction any units tendered to third parties, contending that the offers did not conform with the terms of the Settlement. Counsel for the Objector (on behalf of another investor) had alternatively requested the Court take certain action purportedly to enforce the terms of the settlement agreement. On December 18, 2003, the Court heard oral argument on the motions and denied them both in their entirety. On January 28, 2004, Objector filed his opening brief in his pending appeal. The Managing General Partner is currently scheduled to file a brief in support of the order approving settlement and entering judgment thereto by April 23, 2004. On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General Partner, was served with a Complaint in the United States District Court, District of Columbia alleging that AIMCO Properties L.P. willfully violated the Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. The Complaint is styled as a Collective Action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties L.P. failed to compensate maintenance workers for time that they were required to be "on-call". Additionally, the Complaint alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call". The Complaint also attempts to certify a subclass for salaried service directors who are challenging their classification as exempt from the overtime provisions of the FLSA. AIMCO Properties L.P. has filed an answer to the Complaint denying the substantive allegations. Discovery is currently underway. 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 matters involving it or its investment properties that are not of a routine nature arising in the ordinary course of business. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Item 8a. Controls and Procedures (a) Disclosure Controls and Procedures. The Partnership's management, with the participation of 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, has evaluated the effectiveness of the Partnership's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, 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 concluded that, as of the end of such period, the Partnership's disclosure controls and procedures are effective. (b) Internal Control Over Financial Reporting. There have not been any changes in the Partnership's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2003 that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act National Property Investors 7 (the "Partnership" or the "Registrant") has no officers or directors. The managing general partner of the Partnership is NPI Equity Investments, Inc. ("NPI Equity" or the "Managing General Partner"). The present directors and officers of the Managing General Partner are listed below: Name Age Position Peter K. Kompaniez 59 Director Martha L. Long 44 Director and Senior Vice President Harry G. Alcock 41 Executive Vice President Miles Cortez 60 Executive Vice President, General Counsel and Secretary Patti K. Fielding 40 Executive Vice President Paul J. McAuliffe 47 Executive Vice President and Chief Financial Officer Thomas M. Herzog 41 Senior Vice President and Chief Accounting Officer Peter K. Kompaniez has been Director of the Managing General Partner since February 2004. Mr. Kompaniez has been Vice Chairman of the Board of Directors of AIMCO since July 1994 and was appointed President in July 1997. Mr. Kompaniez has also served as Chief Operating Officer of NHP Incorporated after it was acquired by AIMCO in December 1997. Effective April 1, 2004, Mr. Kompaniez resigned as President of AIMCO. Mr. Kompaniez will continue in his role as Director of the Managing General Partner and Vice Chairman of AIMCO's Board and will serve AIMCO on a variety of special and ongoing projects in an operating role. Martha L. Long has been a Director and Senior Vice President of the Managing General Partner since February 2004. Ms. Long has been with AIMCO since October 1998 and has served in various capacities. From 1998 to 2001, Ms. Long served as Senior Vice President and Controller of AIMCO and the Managing General Partner. During 2002 and 2003, Ms. Long served as Senior Vice President of Continuous Improvement for AIMCO. Harry G. Alcock was appointed Executive Vice President of the Managing General Partner in February 2004 and has been Executive Vice President and Chief Investment Officer of AIMCO since October 1999. Prior to October 1999 Mr. Alcock served as a Vice President of AIMCO from July 1996 to October 1997, when he was promoted to Senior Vice President-Acquisitions where he served until October 1999. Mr. Alcock has had responsibility for acquisition and financing activities of AIMCO since July 1994. Miles Cortez was appointed Executive Vice President, General Counsel and Secretary of the Managing General Partner in February 2004 and of AIMCO in August 2001. Prior to joining AIMCO, Mr. Cortez was the senior partner of Cortez Macaulay Bernhardt & Schuetze LLC, a Denver law firm, from December 1997 through September 2001. Patti K. Fielding was appointed Executive Vice President - Securities and Debt of the Managing General Partner in February 2004 and of AIMCO in February 2003. Ms. Fielding previously served as Senior Vice President - Securities and Debt of AIMCO from January 2000 to February 2003. Ms. Fielding is responsible for securities and debt financing and the treasury department. Ms. Fielding joined AIMCO in February 1997 and served as Vice President - Tenders, Securities and Debt until January 2000. Paul J. McAuliffe has been Executive Vice President and Chief Financial Officer of the Managing General Partner since April 2002. Mr. McAuliffe has served as Executive Vice President of AIMCO since February 1999 and was appointed Chief Financial Officer of AIMCO in October 1999. From May 1996 until he joined AIMCO, Mr. McAuliffe was Senior Managing Director of Secured Capital Corp. Thomas M. Herzog was appointed Senior Vice President and Chief Accounting Officer of the Managing General Partner in February 2004 and of AIMCO in January 2004. Prior to joining AIMCO in January 2004, Mr. Herzog was at GE Real Estate, serving as Chief Accounting Officer & Global Controller from April 2002 to January 2004 and as Chief Technical Advisor from March 2000 to April 2002. Prior to joining GE Real Estate, Mr. Herzog was at Deloitte & Touche LLP from 1990 until 2000, including a two-year assignment in the real estate national office. One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act. Further, one or more of the above persons are also directors and/or officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act. The board of directors of the Managing General Partner does not have a separate audit committee. As such, the board of directors of the Managing General Partner fulfills the functions of an audit committee. The board of directors has determined that Martha L. Long meets the requirement of an "audit committee financial expert". The directors and officers of the Managing General Partner with authority over the Partnership are all employees of subsidiaries of AIMCO. AIMCO has adopted a code of ethics that applies to such directors and officers that is posted on AIMCO's website (www.AIMCO.com). AIMCO's website is not incorporated by reference to this filing. Item 10. Executive Compensation Neither the directors nor officers of the Managing General Partner received any remuneration from the Partnership during the year ended December 31, 2003. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding limited partnership units of the Partnership owned by each person who is known by the Partnership to own beneficially or exercise voting or dispositive control over more than 5% of the Partnership's limited partnership units, by each of the directors and by all directors and executive officers of the Managing General Partner as a group as of December 31, 2003. Amount and Nature Name of Beneficial Owner of Beneficial % of Class Owner AIMCO IPLP, L.P. 25,399.00 41.97% (an affiliate of AIMCO) AIMCO Properties, L.P. 16,250.67 26.85% (an affiliate of AIMCO) AIMCO IPLP, L.P. (formerly known as Insignia Properties, L.P.) is indirectly ultimately owned by AIMCO. Its business address is 55 Beattie Place, Greenville, South Carolina 29602. AIMCO Properties, L.P. is indirectly ultimately controlled by AIMCO. Its business address is 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237. No director or officer of the Managing General Partner owns any units. Item 12. Certain Relationships and Related Transactions 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 years ended December 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 $339,000 and $373,000 for the years ended December 31, 2003 and 2002, respectively, which is included in operating expenses and (loss) income from discontinued operations. An affiliate of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $270,000 and $254,000 for the years ended December 31, 2003 and 2002, respectively, which are included in general and administrative expenses 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 $15,000 and $26,000 for the years ended December 31, 2003 and 2002, respectively. The construction management service fees are calculated based on a percentage of current year additions to investment properties. At December 31, 2003, approximately $30,000 in reimbursement was due to the Managing General Partner and was included in Due to affiliates on the accompanying balance sheet. 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 $62,000 and $91,000 in such reimbursements for the years ended December 31, 2003 and 2002, respectively, 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 earned approximately $53,000 and $33,000 for such fees during the years ended December 31, 2003 and 2002, respectively, which is included in general and administrative expenses. Upon the sale of the Partnership's properties, NPI Equity will be entitled to an incentive compensation fee equal to a declining percentage of the difference between the total amount distributed to limited partners and the appraised value of their investment at February 1, 1992. The percentage amount to be realized by NPI Equity, if any, will be dependent upon the year in which the property is sold. Payment of the incentive compensation fee is subordinated to the receipt by the limited partners, of: (a) distributions from capital transaction proceeds of an amount equal to their appraised investment in the Partnership at February 1, 1992; and (b) distributions from all sources (capital transactions as well as cash flow) of an amount equal to six percent (6%) per annum cumulative, non-compounded, on their present appraised investment in the Partnership at February 1, 1992. During the year ended December 31, 2003, these preferences were met and the Managing General Partner was entitled to approximately $180,000 related to the sales of Northwoods I & II and South Point Apartments. At December 31, 2003, approximately $42,000 related to the sale of South Point Apartments was due to the Managing General Partner and was included in Due to affiliates. An affiliate of the Managing General Partner earned approximately $93,000 for services related to the refinancings of Patchen Place and South Point Apartment during the year ended December 31, 2003. These costs were capitalized at the time of the refinancings and subsequently written off when the properties were sold later in 2003. NPI Equity, on behalf of the Partnership and certain affiliated partnerships, has established a revolving credit facility (the "Partnership Revolver") to be used to fund deferred maintenance and working capital needs of the Partnership and certain other affiliated partnerships in the National Property Investors Partnership Series. The maximum draw available to the Partnership under the Partnership Revolver is $500,000. Loans under the Partnership Revolver will have a term of 365 days, be unsecured and bear interest at the prime rate plus 2% per annum. The maturity date of any such borrowing accelerates in the event of: (i) the removal of NPI Equity as the managing general partner (whether or not for cause); (ii) the sale or refinancing of a property by the Partnership (whether or not a borrowing under the Partnership Revolver was made with respect to such property); or (iii) the liquidation of the Partnership. At December 31, 2003, the Partnership had no outstanding amounts due under this Partnership Revolver. 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 the years ended December 31, 2003 and 2002, the Partnership was charged by AIMCO and its affiliates approximately $92,000 and $78,000, respectively, for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the Managing 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 December 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 in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unit holders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, 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 and its affiliates are in a position to influence all such voting decisions with respect to the Partnership. However, DeForest Ventures II L.P., from whom Insignia Properties LP ("IPLP") an affiliate of the Managing General Partner and of AIMCO acquired 25,399 Units (41.97% of the units), 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 its affiliates; and (ii) on all other matters submitted by it or its affiliates, in proportion to the votes cast by third party unit holders. Except for the foregoing, no other limitations are imposed on IPLP's, AIMCO's or any other affiliates right to vote each unit held. 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. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits: See Exhibit Index attached. (b) Reports on Form 8-K filed in the fourth quarter of calendar year 2003: Current Report on Form 8-K dated December 9, 2003 and filed on December 23, 2003 disclosing the sale of Northwoods I and II Apartments. Item 14. Principal Accounting Fees and Services The Managing General Partner has reappointed Ernst & Young LLP as independent auditors to audit the financial statements of the Partnership for 2004. Audit Fees. The Partnership paid to Ernst & Young LLP audit fees of $67,000 and $53,000 for 2003 and 2002, respectively. Tax Fees. The Partnership paid to Ernst & Young LLP fees for tax services for 2003 and 2002 of approximately $28,000 and $26,000, respectively. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL PROPERTY INVESTORS 7 By: NPI EQUITY INVESTMENTS, INC. Managing General Partner By: /s/Martha L. Long Martha L. Long Senior Vice President By: /s/Thomas M. Herzog Thomas M. Herzog Senior Vice President and Chief Accounting Officer Date:March 26, 2004 In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. s/Peter K. Kompaniez Director Date:March 26, 2004 Peter K. Kompaniez /s/Martha L. Long Director and Senior Vice Date:March 26, 2004 Martha L. Long President /s/Thomas M. Herzog Senior Vice President and Date:March 26, 2004 Thomas M. Herzog Chief Accounting Officer EXHIBIT INDEX Exhibit Number Description of Exhibit 2.5 Master Indemnity Agreement dated as of August 17, 1995. (1) 3.4 (a) Agreement of Limited Partnership. (3) (b) Amendments to the Agreement of Limited Partnership. (4) (c) Amendments to the Agreement of Limited Partnership. (5) (d) Amendments to the Agreements of Limited Partnership. (6) 10.3 Property Management Agreement dated June 21, 1991, by and between the Registrant and NPI Management incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (7) 10.10 Multifamily Note dated December 9, 1999, by and between National Property Investors 7, a California limited partnership and GMAC Commercial Mortgage Corporation, a California corporation. (10) (1) Incorporated by reference to Exhibit 2.5 to Form 8-K filed by Insignia with the Securities and Exchange Commission on September 1, 1995. (3) Incorporated by reference to Exhibit A to the Prospectus of the Registrant dated July 5, 1978, contained in the Registrant's Registration Statement on Form S-11 (Reg. No. 2-599991). (4) Incorporated by reference to the Definitive Proxy Statement of the Partnership dated July 2, 1981. (5) Incorporated by reference to Definitive Proxy statement of the Partnership dated April 3, 1991. (6) Incorporated by reference, to the Statement Furnished in Connection With the Solicitation of Consents of the Registrant dated August 28, 1992. (7) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. Identical agreements have been entered into for each of the Registrant's properties. The only difference in the agreements is that the applicable property name has been inserted into the agreement. (10) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the period ended December 31, 1999. 10.11 Multifamily Note dated August 31, 2001, by and between National Property Investors 7, a California Limited Partnership, and GMAC Commercial Mortgage Corporation, a California Corporation relating to Northwoods I and II Apartments. (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001). 10.12 Multifamily Note dated November 30, 2001, by and between National Property Investors 7, a California Limited Partnership and GMAC Commercial Mortgage Corporation, a California corporation relating to Fairway View II Apartments (incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2002). 10.13 Multifamily Note dated May 16, 2003, between National Property Investors 7, a California limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation, related to Patchen Place Apartments (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003). 10.14 Seventh Reaffirmation and Joinder Agreement dated June 16, 2003 between AIMCO Properties, LP, a Delaware limited partnership, National Property Investors 7, a California limited partnership, GMAC Commercial Mortgage Corporation, a California corporation, the parties who are the current borrowers under the Loan Agreement, the parties who are the Spring Hill Guarantors under the Loan Agreement and Fannie Mae, a federally chartered and stockholder-owned corporation, related to Patchen Place Apartments (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003). 10.15 Multifamily Note dated June 27, 2003, between National Property Investors 7, a California limited partnership, and Stewart Title of North Carolina, Inc., a North Carolina corporation, related to South Point Apartments (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003). 10.16 Eighth Reaffirmation and Joinder Agreement dated July 17, 2003 between AIMCO Properties, LP, a Delaware limited partnership, National Property Investors 7, a California limited partnership, GMAC Commercial Mortgage Corporation, a California corporation, the parties who are the current borrowers under the Loan Agreement, the parties who are the Spring Hill Guarantors under the Loan Agreement and Fannie Mae, a federally chartered and stockholder-owned corporation, related to South Point Apartments (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003). 10.17 Purchase and Sale Contract between Registrant and Vermeil, LLC, dated July 31, 2003 (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003). 10.18 Reinstatement and Amendment of Purchase and Sale Contract between Registrant and Vermeil, LLC, dated September 5, 2003 (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003). 10.19 Purchase and Sale Contract between Registrant and Watervliet Shores Associates, dated September 11, 2003 (incorporated by reference to the Registrant's Current Report on Form 8-K dated December 9, 2003). 10.20 Purchase and Sale Contract between Registrant and The Dilweg Companies, LLC, dated October 20, 2003 (incorporated by reference to the Registrant's Current Report on Form 8-K dated December 30, 2003). 10.21 Amendment to Purchase and Sale Contract between Registrant and The Dilweg Companies, LLC, dated October 27, 2003 (incorporated by reference to the Registrant's Current Report on Form 8-K dated December 30, 2003). 10.22 Reinstatement and Second Amendment to Purchase and Sale Contract between Registrant and The Dilweg Companies, LLC, dated November 6, 2003 (incorporated by reference to the Registrant's Current Report on Form 8-K dated December 30, 2003). 10.23 Third Amendment to Purchase and Sale Contract between Registrant and The Dilweg Companies, LLC, dated December 17, 2003 (incorporated by reference to the Registrant's Current Report on Form 8-K dated December 30, 2003). 10.24 Assignment and Assumption of Real Estate Sale Agreement between The Dilweg Companies, LLC and HD South Point, LLC, dated December 30, 2003 (incorporated by reference to the Registrant's Current Report on Form 8-K dated December 30, 2003). 31.1 Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 31.1 CERTIFICATION I, Martha L. Long, certify that: 1. I have reviewed this annual report on Form 10-KSB of National Property Investors 7; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2004 /s/Martha L. Long Martha L. Long Senior Vice President of NPI Equity Investments, Inc., equivalent of the chief executive officer of the Partnership Exhibit 31.2 CERTIFICATION I, Thomas M. Herzog, certify that: 1. I have reviewed this annual report on Form 10-KSB of National Property Investors 7; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2004 /s/Thomas M. Herzog Thomas M. Herzog Senior Vice President and Chief Accounting Officer of NPI Equity Investments, Inc., equivalent of the chief financial officer of the Partnership Exhibit 32.1 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 Annual Report on Form 10-KSB of National Property Investors 7 (the "Partnership"), for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Martha L. Long, as the equivalent of the Chief Executive Officer of the Partnership, and Thomas M. Herzog, 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/Martha L. Long Name: Martha L. Long Date: March 26, 2004 /s/Thomas M. Herzog Name: Thomas M. Herzog Date: March 26, 2004 This certification is furnished with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.