-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wgy3TpIWX06glg/zWj97nXr9npMWHOLoWeAclgtG5tvncYSr9NvogwpYpEuWZmvp h8xfq14ue+HwnXOXrVWr0g== 0000711642-99-000262.txt : 19991111 0000711642-99-000262.hdr.sgml : 19991111 ACCESSION NUMBER: 0000711642-99-000262 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL PROPERTY INVESTORS 7 CENTRAL INDEX KEY: 0000732439 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133230613 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-13454 FILM NUMBER: 99745255 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 10QSB 1 FORM 10-QSB---QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to _________ Commission file number 0-13454 NATIONAL PROPERTY INVESTORS 7 (Exact name of small business issuer as specified in its charter) California 13-3230613 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, Post Office Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) NATIONAL PROPERTY INVESTORS 7 BALANCE SHEET (Unaudited) (in thousands, except per unit data) September 30, 1999 Assets Cash and cash equivalents $ 1,999 Receivables and deposits 424 Restricted escrows 459 Other assets 487 Investment properties: Land $ 3,738 Buildings and related personal property 42,614 46,352 Less accumulated depreciation (27,117) 19,235 $ 22,604 Liabilities and Partners' (Deficit) Capital Liabilities Accounts payable $ 102 Tenant security deposit liabilities 117 Accrued property taxes 149 Other liabilities 244 Mortgage notes payable 20,216 Partners' (Deficit) Capital: General partner $ (285) Limited partners (60,517 units issued and outstanding) 2,061 1,776 $ 22,604 See Accompanying Notes to Financial Statements b) NATIONAL PROPERTY INVESTORS 7 STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per unit data) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 Revenues: Rental income $ 1,808 $ 1,742 $ 5,405 $ 5,119 Other income 70 109 211 294 Total revenues 1,878 1,851 5,616 5,413 Expenses: Operating 710 774 2,114 2,298 General and administrative 45 105 189 317 Depreciation 450 432 1,321 1,279 Interest 409 409 1,230 1,229 Property taxes 103 97 319 292 Total expenses 1,717 1,817 5,173 5,415 Net income (loss) 161 $ 34 $ 443 $ (2) Net income allocated to general partner (1%) $ 2 $ -- $ 4 $ -- Net income (loss) allocated to limited partners (99%) 159 34 439 (2) $ 161 $ 34 $ 443 $ (2) Net income (loss) per limited partnership unit $ 2.63 $ .56 $ 7.25 $ (.03) Distributions per limited partnership unit $ -- $ 12.27 $ 4.91 $ 27.17 See Accompanying Notes to Financial Statements c) NATIONAL PROPERTY INVESTORS 7 STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL (Unaudited) (in thousands, except per unit data) Limited Partnership General Limited Units Partner Partners Total Original capital contributions 60,517 $ 1 $30,259 $30,260 Partners' (deficit) capital at December 31, 1998 60,517 $ (286) $ 1,919 $ 1,633 Distributions to partners -- (3) (297) (300) Net income for the nine months ended September 30, 1999 -- 4 439 443 Partners' (deficit) capital at September 30, 1999 60,517 $ (285) $ 2,061 $ 1,776 See Accompanying Notes to Financial Statements d) NATIONAL PROPERTY INVESTORS 7 STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 1999 1998 Cash flows from operating activities: Net income (loss) $ 443 $ (2) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 1,321 1,279 Amortization of loan costs 83 83 Change in accounts: Receivables and deposits 48 (146) Other assets (62) 29 Accounts payable 45 (5) Tenant security deposit liabilities (12) 1 Accrued property taxes (31) 182 Other liabilities (8) 9 Net cash provided by operating activities 1,827 1,430 Cash flows from investing activities: Property improvements and replacements (523) (282) Net (deposits to) withdrawals from restricted escrows (49) 164 Net cash used in investing activities (572) (118) Cash flows from financing activities: Payments on mortgage notes payable (30) (28) Distributions to partners (300) (1,661) Net cash used in financing activities (330) (1,689) Net increase (decrease)in cash and cash equivalents 925 (377) Cash and cash equivalents at beginning of period 1,074 2,500 Cash and cash equivalents at end of period $ 1,999 $ 2,123 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,144 $ 1,147 See Accompanying Notes to Financial Statements e) NATIONAL PROPERTY INVESTORS 7 NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements of National Property Investors 7 (the "Partnership" or "Registrant") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of NPI Equity Investments, Inc. (the "Managing General Partner" or "NPI Equity"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. For further information, refer to the financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-KSB for the year ended December 31, 1998. NOTE B - TRANSFER OF CONTROL Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. ("Insignia") and Insignia Properties Trust merged into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership. NOTE C - 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. The following payments were made to the Managing General Partner and affiliates during the nine month periods ended September 30, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expenses) $285 $272 Reimbursement for services of affiliates (included in investment properties and operating and general and administrative expenses) 139 154 Non-accountable reimbursement (included in general and administrative expenses) -- 91 Partnership management fee (included in general and administrative expenses) -- 34 During the nine months ended September 30, 1999 and 1998, affiliates of the Managing General Partner were entitled to receive 5% of gross receipts from all of the Registrant's properties for providing property management services. The Registrant paid to such affiliates approximately $285,000 and $272,000 for the nine months ended September 30, 1999 and 1998, respectively. An affiliate of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $139,000 and $154,000 for the nine months ended September 30, 1999 and 1998, respectively, including approximately $15,000 and $9,000, respectively, in reimbursements for construction oversight costs. For services relating to the administration of the Partnership and operation of Partnership properties, the Managing General Partner is entitled to receive payment for non-accountable expenses up to a maximum of $150,000 per year from distributions from operations, based upon the number of Partnership units sold, subject to certain limitations. The Managing General Partner received approximately $91,000 in reimbursements for the nine months ended September 30, 1998. The Managing General Partner was not entitled to receive a similar reimbursement during the nine months ended September 30, 1999 because there were no distributions from operations. For managing the affairs of the Partnership, the Managing General Partner of the Partnership is entitled to receive a partnership management fee. The fee is equal to 4% of the Partnership's adjusted cash from operations, as defined in the Partnership Agreement, in any year, provided that 50% of the fee shall not be paid until the Partnership has distributed to the limited partners adjusted cash from operations in such year which is equal to 5% of the limited partners' adjusted invested capital, as defined, on a non-cumulative basis. In addition, 50% of the fee shall not be paid until the Partnership has distributed to the limited partners adjusted cash from operations in such year which is equal to 8% of the limited partners' adjusted invested capital on a non-cumulative basis. The fee shall be paid when adjusted cash from operations is distributed to the limited partners. The Managing General Partner was paid approximately $34,000 during the nine months ended September 30, 1998 for such fees. The Managing General Partner was not entitled to receive a similar reimbursement during the nine months ended September 30, 1999, because there were no distributions from operations. The Managing General Partner has extended to the Partnership a line of credit of up to $500,000. Loans under the line of credit will have a term of 365 days, be unsecured and bear interest at the rate of 2% per annum in excess of the prime rate announced from time to time by Chemical Bank, N.A. The maturity date of such borrowing will be accelerated in the event of: (i) the removal of the Managing General Partner (whether or not For Cause); (ii) the sale or refinancing of a property by the Partnership; or (iii) the liquidation of the Partnership. At the present time, the Partnership has no outstanding amounts due under this line of credit. On June 9, 1999, AIMCO Properties, L.P., an affiliate of the Managing General Partner, commenced a tender offer to purchase up to 15,917.48 (approximately 26.30% of the total outstanding units) units of limited partnership interest in the Partnership for a purchase price of $175 per unit. The offer expired on July 14, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 1,076.00 units. As a result, AIMCO and its affiliates currently own 26,663.00 units of limited partnership interest in the Partnership representing approximately 44.06% of the total outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO (see "Note F - Legal Proceedings"). NOTE D - DISTRIBUTIONS A distribution of approximately $297,000 ($4.91 per limited partnership unit) to the limited partners and approximately $3,000 to the general partner from refinancing proceeds in prior years was paid during the nine months ended September 30, 1999. Total cash distributed from operations was approximately $1,644,000 ($27.17 per limited partnership unit) to the limited partners and approximately $17,000 to the general partner for the nine months ended September 30, 1998. NOTE E - SEGMENT REPORTING The Partnership has one reportable segment: residential properties. The Partnership's residential property segment consists of five apartment complexes located in the Southeast. The Partnership rents apartment units to tenants for terms that are typically twelve months or less. The Partnership evaluates performance based on net income. The accounting policies of the reportable segment are the same as those of the Partnership as described in the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. The Partnership's reportable segment is investment properties that offer similar products and services. Although each of the investment properties is managed separately, they have been aggregated into one segment as they provide services with similar types of products and customers. Segment information for the nine months ended September 30, 1999 and 1998, is shown in the tables below (in thousands). The "Other" column includes partnership administration related items and income and expense not allocated to the reportable segment. 1999 Residential Other Totals Rental income $ 5,405 $ -- $ 5,405 Other income 203 8 211 Interest expense 1,230 -- 1,230 Depreciation 1,321 -- 1,321 General and administrative expense -- 189 189 Segment profit (loss) 624 (181) 443 Total assets 22,408 196 22,604 Capital expenditures for investment properties 523 -- 523 1998 Residential Other Totals Rental income $ 5,119 $ -- $ 5,119 Other income 223 71 294 Interest expense 1,229 -- 1,229 Depreciation 1,279 -- 1,279 General and administrative expense -- 317 317 Segment profit (loss) 244 (246) (2) Total assets 22,166 1,903 24,069 Capital expenditures for investment properties 282 -- 282 NOTE F - 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. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates to acquire limited partnership units, the management of partnerships by Insignia Affiliates and the Insignia Merger (see "Note B - Transfer of Control"). The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs have filed an amended complaint. The Managing General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject to final court approval, on behalf of the Partnership and all limited partners who own units as of November 3, 1999. The Court has preliminarily approved the Settlement and scheduled a final approval hearing for December 10, 1999. In exchange for a release of all claims, the Stipulation provides that, among other things, an affiliate of the general partner will make tender offers for all outstanding limited partnership interests in 49 partnerships, including the Registrant, subject to the terms and conditions set forth in the Stipulation, and has agreed to establish a reserve to pay an additional amount in settlement to qualifying class members (the "Settlement Fund"). At the final approval hearing, Plaintiffs' counsel will make an application for attorneys' fees and reimbursement of expenses, to be paid in part by the partnerships and in part from the Settlement Fund. The Managing General Partner does not anticipate that costs associated with this case will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The matters discussed in this Form 10-QSB contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-QSB and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussion of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Registrant's business and results of operation. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. The Partnership's investment properties consist of five apartment complexes. The following table sets forth the average occupancy of the properties for each of the nine month periods ended September 30, 1999 and 1998: Average Occupancy 1999 1998 Fairway View II Apartments 96% 96% Baton Rouge, Louisiana Northwoods Apartments 95% 95% Pensacola, Florida Patchen Place Apartments 93% 85% Lexington, Kentucky The Pines Aparments 96% 95% Roanoke, Virginia South Point Apartments 93% 89% Durham, North Carolina The Managing General Partner attributes the increase in occupancy at Patchen Place and South Point Apartments to improved market conditions and increased marketing efforts. The Managing General Partner also attributes the increase in occupancy at South Point Apartments to staggering lease terms to offset lower occupancy traditionally experienced due to students moving out during the summer months. Results of Operations The Registrant's net income for the nine months ended September 30, 1999 was approximately $443,000 as compared to a net loss of approximately $2,000 for the nine months ended September 30, 1998. The Registrant's net income for the three months ended September 30, 1999 was approximately $161,000 as compared to net income of approximately $34,000 for three months ended September 30, 1998. The increase in net income for the three and nine months ended September 30, 1999 as compared to the comparable periods in 1998 was due to an increase in total revenues and a decrease in total expenses. Total revenues increased due to an increase in rental income which was partially offset by a decrease in other income. Rental income increased primarily due to increased or stable occupancy and increased average rental rates at all of the Partnership's investment properties and decreased concession costs at Northwoods Apartments and Patchen Place Apartments. The decrease in other income was primarily due to a decrease in interest income as a result of lower interest bearing cash balances held by the Partnership during 1999. In addition, the rental of furnished units to corporations at Patchen Place was discontinued during 1998. As a result, the additional income attributable to furnished units decreased for the nine months ended September 30, 1999, as compared to the same period in 1998. These decreases were partially offset by increased tenant charges at South Point, The Pines, and Northwoods Apartments. Total expenses decreased primarily due to reductions in operating expenses and general and administrative expenses which were partially offset by increases in property tax expense and depreciation expense. Operating expenses decreased primarily due to decreased maintenance expenses resulting from a balcony replacement project at Patchen Place which was completed in 1998 and a decrease in landscaping expenses at Fairway View II. Also, corporate unit expense decreased at Patchen Place and insurance expense decreased at all the Partnership's properties due to a change in insurance carriers in late 1998. General and administrative expenses decreased primarily due to fees paid to the Managing General Partner in connection with the distributions from operations made during the first three quarters of 1998. For the nine months ended September 30, 1999, no similar fees were paid because the distribution paid during this period was from refinancing proceeds. In addition, reimbursements to the Managing General Partner for services decreased. Included in general and administrative expenses at both September 30, 1999 and 1998, are management reimbursements to the Managing General Partner allowed under the Partnership Agreement. In addition, costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement are also included. Property tax expense increased due to the timing of receipt of the property tax bills for 1999 and 1998 which affected the accruals as of September 30, 1999 and 1998. Depreciation expense increased due to property improvements and replacements completed during the last twelve months which are now being depreciated. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expense. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Liquidity and Capital Resources At September 30, 1999, the Partnership had cash and cash equivalents of approximately $1,999,000 as compared to approximately $2,123,000 at September 30, 1998. Cash and cash equivalents increased by approximately $925,000 from the Partnership's year ended December 31, 1998 due to approximately $1,827,000 of cash provided by operating activities which more than offset approximately $572,000 of cash used in investing activities and approximately $330,000 of cash used in financing activities. Cash used in investing activities consisted of property improvements and replacements and, to a lesser extent, net deposits to escrow accounts maintained by the mortgage lender. Cash used in financing activities consisted primarily of partner distributions and, to a lesser extent, payments of principal made on the mortgage encumbering The Pines. The Managing General Partner has extended to the Partnership a $500,000 line of credit. The Partnership has no outstanding amounts due under this line of credit. Based on present plans, the Managing General Partner does not anticipate the need to borrow against the line of credit in the near future. Other than unrestricted cash and cash equivalents, the line of credit is the Partnership's only unused source of liquidity. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the properties to adequately maintain the physical assets and other operating needs of the Registrant and to comply with Federal, state and local legal and regulatory requirements. Capital improvements for each of the Registrant's properties are detailed below. Fairway View II During the nine months ended September 30, 1999, the Partnership completed approximately $77,000 of capital improvements at Fairway View II, consisting primarily of structural improvements, landscaping, and carpet and vinyl replacements. These improvements were funded from the Partnership's reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $258,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $190,000 for 1999, which include certain of the required improvements and consist of carpet and vinyl replacement, landscaping, parking lot resurfacing and pool upgrades. The Pines During the nine months ended September 30, 1999, the Partnership completed approximately $107,000 of capital improvements at The Pines, consisting primarily of carpet and vinyl replacement, other structural improvements, parking lot resurfacing, and pool upgrades. The pool upgrades were complete as of September 30, 1999. These improvements were funded from operating cash flow and the Partnership's reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $249,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $291,000 for 1999, which include certain of the required improvements and consist of carpet and vinyl replacement, parking lot resurfacing, pool upgrades, appliances and water heaters. Patchen Place During the nine months ended September 30, 1999, the Partnership completed approximately $133,000 of capital improvements at Patchen Place, consisting primarily of carpet and vinyl replacement, light fixtures, improvement to the recreation facilities, electrical upgrades, and other structural improvements. The electrical upgrades, light fixtures, recreation facility improvements, and other structural improvements were complete as of September 30, 1999. These improvements were funded from operating cash flows. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $179,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $217,000 for 1999, which include certain of the required improvements and consist of carpet and vinyl replacement, landscaping, parking lot resurfacing, improvement to the recreation facilities, and the replacement of appliances. Northwoods During the nine months ended September 30, 1999, the Partnership completed approximately $108,000 of capital improvements at Northwoods I & II, consisting primarily of carpet and vinyl, countertop, and appliance replacements. These improvements were funded from Partnership reserves and operating cash flow. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $312,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $383,000 for 1999, which include certain of the required improvements and consist of furniture and fixture replacements, cabinet and countertop replacements, carpet and vinyl replacements, landscaping, roof replacement, parking lot resurfacing, plumbing upgrades, appliances, as well as other structural improvements. South Point During the nine months ended September 30, 1999, the Partnership completed approximately $98,000 of capital improvements at South Point, consisting primarily of structural improvements and carpet and vinyl replacement. The structural improvements were complete as of September 30, 1999. These improvements were funded from Partnership reserves and operating cash flow. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $167,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $199,000 for 1999, which include certain of the required improvements and consist of carpet replacement, parking lot resurfacing, and other structural improvements. 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 Registrant's distributable cash flow, if any, may be adversely affected at least in the short term. The Registrant's current assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Registrant. The mortgage indebtedness of approximately $3,416,000 encumbering The Pines is amortized over 30 years with a balloon payment of approximately $3,357,000 due on February 1, 2001. The mortgage indebtedness of $16,800,000 encumbering the remaining properties is interest only with required balloon payments due November 1, 2003. The Managing General Partner will attempt to refinance such indebtedness and/or sell the properties prior to such maturity date. If the properties cannot be refinanced or sold for a sufficient amount, the Registrant may risk losing such properties through foreclosure. Cash distributions from refinancing proceeds in prior years of approximately $300,000 (approximately $297,000 to the limited partners or $4.91 per limited partnership unit) were paid during the nine months ended September 30, 1999. Distributions of approximately $1,661,000 (approximately $1,644,000 to the limited partners or $27.17 per limited partnership unit) were made from operations during the nine months ended September 30, 1998. Future cash distributions will depend on the levels of net cash generated from operations, timing of debt maturities, property sales, refinancings, and the availability of cash reserves. The Registrant's distribution policy is reviewed on a semi-annual basis. There can be no assurance, however, that the Partnership will generate sufficient funds from operations after required capital expenditures to permit any additional distributions to its partners during the remainder of 1999 or subsequent periods. Tender Offer On June 9, 1999, AIMCO Properties, L.P., an affiliate of the Managing General Partner, commenced a tender offer to purchase up to 15,917.48 (approximately 26.30% of the total outstanding units) units of limited partnership interest in the Partnership for a purchase price of $175 per unit. The offer expired on July 14, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 1,076.00 units. As a result, AIMCO and its affiliates currently own 26,663.00 units of limited partnership interest in the Partnership representing approximately 44.06% of the total outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO (see "Item 1. Financial Statements, Note F - Legal Proceedings"). Year 2000 Compliance General Description of the Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology (IT) and Non-IT Systems The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The Partnership is dependent upon the Managing General Partner and its affiliates for management and administrative services ("Managing Agent"). Any of the computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Over the past two years, the Managing Agent has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Managing Agent presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or not completed in time, the Year 2000 issue could have a material impact on the operations of the Partnership. The Managing Agent's plan to resolve Year 2000 issues involves four phases: assessment, remediation, testing, and implementation. To date, the Managing Agent has fully completed its assessment of all the information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phases on both hardware and software systems. Assessments are continuing in regards to embedded systems. The status of each is detailed below. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase Computer Hardware: During 1997 and 1998, the Managing Agent identified all of the computer systems at risk and formulated a plan to repair or replace each of the affected systems. In August 1998, the main computer system used by the Managing Agent became fully functional. In addition to the main computer system, PC-based network servers, routers and desktop PCs were analyzed for compliance. The Managing Agent has begun to replace each of the non-compliant network connections and desktop PCs and, as of September 30, 1999, had virtually completed this effort. The total cost to the Managing Agent to replace the PC-based network servers, routers and desktop PCs is expected to be approximately $1.5 million of which $1.3 million has been incurred to date. Computer Software: The Managing Agent utilizes a combination of off-the-shelf, commercially available software programs as well as custom-written programs that are designed to fit specific needs. Both of these types of programs were studied, and implementation plans written and executed with the intent of repairing or replacing any non-compliant software programs. In April 1999 the Managing Agent embarked on a data center consolidation project that unifies its core financial systems under its Year 2000 compliant system. The estimated completion date for this project is October 1999. During 1998, the Managing agent began converting the existing property management and rent collection systems to its management properties Year 2000 compliant systems. The estimated additional costs to convert such systems at all properties, is $200,000, and the implementation and testing process was completed in June 1999. The final software area is the office software and server operating systems. The Managing Agent has upgraded all non-compliant office software systems on each PC and has upgraded virtually all of the server operating systems. Operating Equipment: The Managing Agent has operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. In September 1997, the Managing Agent began taking a census and inventory of embedded systems (including those devices that use time to control systems and machines at specific properties, for example elevators, heating, ventilating, and air conditioning systems, security and alarm systems, etc.). The Managing Agent has chosen to focus its attention mainly upon security systems, elevators, heating, ventilating and air conditioning systems, telephone systems and switches, and sprinkler systems. While this area is the most difficult to fully research adequately, management has not yet found any major non-compliance issues that put the Managing Agent at risk financially or operationally. A pre-assessment of the properties by the Managing Agent has indicated virtually no Year 2000 issues. A complete, formal assessment of all the properties by the Managing Agent was virtually completed by September 30, 1999. Any operating equipment that is found non-compliant will be repaired or replaced. The total cost incurred for all properties managed by the Managing Agent as of September 30, 1999 to replace or repair the operating equipment was approximately $75,000. The Managing Agent estimates the cost to replace or repair any remaining operating equipment is approximately $125,000. The Managing Agent continues to have "awareness campaigns" throughout the organization designed to raise awareness and report any possible compliance issues regarding operating equipment within its enterprise. Nature and Level of Importance of Third Parties and Their Exposure to the Year 2000 The Managing Agent has banking relationships with three major financial institutions, all of which have designated their compliance. The Managing Agent has updated data transmission standards with all of the financial institutions. All financial institutions have communicated that they are Year 2000 compliant and accordingly no accounts were required to be moved from the existing financial institutions. The Partnership does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems (external agent). To date, the Partnership is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Partnership's results of operations, liquidity, or capital resources. However, the Partnership has no means of ensuring that external agents will be Year 2000 compliant. The Managing Agent does not believe that the inability of external agents to complete their Year 2000 remediation process in a timely manner will have a material impact on the financial position or results of operations of the Partnership. However, the effect of non-compliance by external agents is not readily determinable. Costs to Address Year 2000 The total cost of the Year 2000 project to the Managing Agent is estimated at $3.5 million and is being funded from operating cash flows. To date, the Managing Agent has incurred approximately $2.9 million ($0.7 million expenses and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Partnership's portion of these costs are not material. Risks Associated with the Year 2000 The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Partnership could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled ROSALIE NUANES, ET AL. V. INSIGNIA FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates to acquire limited partnership units, the management of partnerships by Insignia Affiliates and the Insignia Merger (see "Part I - Financial Information, Item 1. Financial Statements, Note B - Transfer of Control"). The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs have filed an amended complaint. The Managing General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject to final court approval, on behalf of the Partnership and all limited partners who own units as of November 3, 1999. The Court has preliminarily approved the Settlement and scheduled a final approval hearing for December 10, 1999. In exchange for a release of all claims, the Stipulation provides that, among other things, an affiliate of the general partner will make tender offers for all outstanding limited partnership interests in 49 partnerships, including the Registrant, subject to the terms and conditions set forth in the Stipulation, and has agreed to establish a reserve to pay an additional amount in settlement to qualifying class members (the "Settlement Fund"). At the final approval hearing, Plaintiffs' counsel will make an application for attorneys' fees and reimbursement of expenses, to be paid in part by the partnerships and in part from the Settlement Fund. The Managing General Partner does not anticipate that costs associated with this case will be material to the Partnership's overall operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K: None were filed during the quarter ended September 30, 1999. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL PROPERTY INVESTORS 7 By: NPI EQUITY INVESTMENTS, INC. Its Managing General Partner By: /s/ Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/ Martha L. Long Martha L. Long Senior Vice President and Controller Date: EX-27 2
5 This schedule contains summary financial information extracted from National Property Investors 7 1999 Third Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000732439 NATIONAL PROPERTY INVESTORS 7 1,000 9-MOS DEC-31-1999 SEP-30-1999 1,999 0 0 0 0 0 46,352 27,117 22,604 0 20,216 0 0 0 1,776 22,604 0 5,616 0 0 5,173 0 1,230 0 0 0 0 0 0 443 7.25 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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