10-Q 1 d00998e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (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, 2002 or 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: 0-11779 S/M REAL ESTATE FUND VII, LTD. Exact Name of Registrant as Specified in its Charter Texas 75-1845682 ----- ---------- (State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification No.) 5520 LBJ Freeway, Suite 500, Dallas, Texas 75240 ------------------------------------------ ----- (Address of principal executive offices) (Zip code)

(972) 404-7100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No Not yet applicable X --- --- --- S/M REAL ESTATE FUND VII, LTD.

STATEMENT OF PARTNERS' DEFICIT (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

See accompanying notes to the financial statements. 2 S/M REAL ESTATE FUND VII, LTD. STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to the financial statements. 3 S/M REAL ESTATE FUND VII, LTD.

See accompanying notes to the financial statements. 4 STATEMENTS OF CASH FLOWS (UNAUDITED) NOTES TO THE FINANCIAL STATEMENTS The quarterly unaudited financial statements for S/M Real Estate Fund VII, Ltd. (the "Partnership") include all normal and recurring adjustments which are, in the opinion of the general partners, necessary to present a fair statement of financial position as of September 30, 2002, the results of operations for the three and nine months ended September 30, 2002 and 2001, the change in partners' deficit for the nine months ended September 30, 2002, and the cash flows for the nine months ended September 30, 2002 and 2001. Results of operations for the period are not necessarily indicative of the results to be expected for the full year. No significant events have occurred subsequent to fiscal year 2001, and no material contingencies exist which would require disclosure in this interim report per Regulation S-X, Rule 10-01, Paragraph (a)(5). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. During the nine months ended September 30, 2002 and 2001, the general partners or their affiliates were reimbursed for Partnership administrative and operating expenses, excluding property and construction management fees, in the amounts of $8,891 and $7,730, respectively. Property management fees earned by an affiliate of the Partnership's general partners were $42,604 and $43,420 for the nine months ended September 30, 2002 and 2001, respectively. The financial information included in this interim report as of September 30, 2002 and for the three and nine months ended September 30, 2002 and 2001 has been prepared by management without audit by independent certified public accountants. The Partnership's 2001 annual report contains audited financial statements including the notes to the financial statements and should be read in conjunction with the financial information contained in this interim report. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), establishing financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of SFAS 144 were effective for the Partnership on January 1, 2002. The implementation of SFAS 144 on January 1, 2002 had no effect on the Partnership's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections." The main provisions of this statement address the classification of debt extinguishments and accounting for certain lease transactions. Implementation of this statement is expected to have no impact on the financial statements of the Partnership. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The main provisions of this statement address the recognition of liabilities associated with an exit or disposal activity. Implementation of this statement is expected to have no impact on the financial statements of the Partnership. 5 S/M REAL ESTATE FUND VII, LTD. PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity and Capital Resources Under the terms of the Partnership's loan agreement, the Partnership is required to make fixed monthly payments of principal and interest in the amount of $43,269 until maturity on January 1, 2009, at which time the entire outstanding principal balance and accrued interest is due. Under the terms of the loan agreement, the Partnership is required to make monthly contributions of $3,905 which are held by the lender pending application for the completion of certain required repairs to the Fifth Avenue property. At September 30, 2002, the balance in this replacement reserve account was $12,380. Cash and cash equivalents totaled $311,505 at September 30, 2002, compared to $216,234 at December 31, 2001. The $95,271 increase is primarily attributable to cash provided by operations and the release of restricted cash (see below) partially offset by debt service payments and payments made to the replacement reserve account and escrow account. Cash held in escrow increased to $218,482 at September 30, 2002, from $53,049 at December 31, 2001. The $165,433 increase is attributable to contributions to the insurance and real estate tax escrow as required by the Partnership's loan agreement. Restricted cash replacement reserve decreased to $12,380 at September 30, 2002, from $106,371 at December 31, 2001. The $93,991 decrease is attributable to the release of $129,622 for replacements and completed required lender repairs, offset in part by monthly contributions to the replacements reserve in accordance with the terms of the loan agreement. Other assets increased to $72,981 at September 30, 2002, from $57,859 at December 31, 2001. The increase is primarily due to increases in prepaid insurance which was partially offset by the amortization of loan costs. Accounts receivable totaled $6,878 at September 30, 2002, compared to $3,846 at December 31, 2001. The increase is primarily attributable to the timing of tenant rental receipts. Accounts payable totaled $59,562 at September 30, 2002, compared to $54,135 at December 31, 2001. The increase is primarily attributable to the timing of payments for property management fees. Accrued expenses and other liabilities totaled $182,145 at September 30, 2002, compared to $39,991 at December 31, 2001. The change is primarily attributable to the timing of payments for real estate taxes and partnership administrative costs. The Partnership's general partners currently expect funds from operations to be sufficient to pay all obligations for 2002, including debt service. In the event of any cash flow deficits, it is expected that such deficits will be funded by the Partnership's existing cash balances. However, there can be no assurance that the Partnership will have sufficient cash to fund such deficits. Results of Operations Operations resulted in net losses of $100,825 and $199,304 for the three and nine-month periods ended September 30, 2002, respectively, compared with net losses of $73,709 and $159,845 for the three and nine-month periods ended September 30, 2001, respectively. The increased net loss for the three and nine-months ended September 30, 2002 from the corresponding periods in 2001 are primarily attributable to decreases in rental income and increases in property operating expenses. Rental income totaled $339,558 and $1,060,860 for the three and nine-month periods ended September 30, 2002, respectively, compared to $365,812 and $1,083,546, respectively, for the corresponding periods in 2001. Occupancy at Fifth Avenue averaged approximately 94% and 95% for the three and nine-month periods ended September 30, 2002, respectively, compared to 98% and 96% for the three and nine-month periods ended September 30, 2001, respectively. The average rental income per occupied square foot at Fifth Avenue was $8.59 and $8.75 for the three and nine months ended September 30, 2002, respectively, compared to $8.85 and $8.92, respectively, for the corresponding periods in 2001. The decreases in the average rental income per occupied square foot in 2002 is primarily attributable to an increase in rental concessions. 6 S/M REAL ESTATE FUND VII, LTD. Total expenses for the three and nine-month periods ended September 30, 2002 were $442,479 and $1,264,477, respectively, compared to $443,765 and $1,255,201, respectively, for the three and nine-month periods ended September 30, 2001. The increase for the nine months ended September 30, 2002 from the corresponding period in 2001 is primarily attributable to an increase in property operating expenses offset in part by a decrease in partnership administration costs. Property operating expenses consist primarily of on-site personnel expenses, utility costs, repair and maintenance costs, property management fees, advertising costs, insurance and real estate taxes. Property operating expenses for the three and nine-month periods ended September 30, 2002 were $198,058 and $553,107, respectively, compared to $202,055 and $532,798, respectively, for the three and nine-month periods ended September 30, 2001. The increase for the nine months ended September 30, 2002 from the corresponding period in 2001 is primarily attributable to higher utility costs and property insurance costs. General and administrative expenses for the three and nine-month periods ended September 30, 2002 were $23,066 and $51,577, respectively, compared to $19,943 and $57,945, respectively, for the three and nine-month periods ended September 30, 2001. The increase for the three month period ended September 30, 2002 from the corresponding period in 2001 is primarily due to higher professional expenses. The decrease for the nine month period ended September 30, 2002 from the corresponding period in 2001 is primarily due to lower legal expenses and other professional expenses. General Words or phrases when used in this Form 10-Q or other filings with the Securities and Exchange Commission, such as "does not believe" and "believes," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the information related to the market risk of the Partnership since December 31, 2001. PART I, ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of the chief executive officer and chief financial officer of our general partner, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. In addition, we reviewed our internal controls, and there has been no significant changes in our internal controls or in other factors including any corrective actions with regard to significant deficiencies and material weaknesses that could significantly affect those controls subsequent to the date of their last evaluation. 7 S/M REAL ESTATE FUND VII, LTD. PART II OTHER INFORMATION ITEMS 1-5 Not applicable. ITEM 6 Exhibits and reports on Form 8-K. (a) Exhibits - 2.1 Voluntary Petition of Shearson-Murray Real Estate Fund VII, Ltd. to commence a case under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas-Austin Division, as filed on June 6, 1989. Reference is made to Exhibit 2a to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 14, 1989. 2.2 Modified First Amended Plan of Reorganization of Shearson-Murray Real Estate Fund VII, Ltd. in the United States Bankruptcy Court for the Western District of Texas-Austin Division Case No. 89-11662-LC filed February 20, 1990. Reference is made to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 12, 1990. 3 Agreement of Limited Partnership of Shearson-Murray Real Estate Fund VII, Ltd., as amended as of September 30, 1983. Reference is made to Partnership's Form 8-K filed with the Securities and Exchange Commission on October 26, 1983. Reference is made to Exhibit A to the Prospectus dated June 10, 1983 contained in Amendment No. 3 to Partnership's Form S-11 Registration Statement filed with the Securities and Exchange Commission June 10, 1983. 10.1 Assignment and Assumption Agreement between Murray Management Corporation and Anterra Management Corporation for property management and leasing services dated January 1, 1990. Reference is made to Exhibit 10u to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission May 15, 1990. 10.2 Loan Agreement between S/M Real Estate Fund VII, Ltd. and General Electric Capital Corporation, dated December 3, 1998. Reference is made to Exhibit 10.1 to Partnership's Form 8-K filed with the Securities and Exchange Commission on December 14, 1998. 99.1 Pages A-16 to A-18 of Exhibit A to the Prospectus dated June 10, 1983, contained in Amendment No. 3 to Partnership's Form S-11 Registration Statement filed with the Securities and Exchange Commission on June 10, 1983. Reference is made to Exhibit 28a to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 12, 1988. 99.2 Pages 10-18 of the Prospectus dated June 10, 1983, contained in Amendment No. 3 to Partnership's Form S-11 Registration Statement filed with the Securities and Exchange Commission on June 10, 1983. Reference is made to Exhibit 28b to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 12, 1988. 8 S/M REAL ESTATE FUND VII, LTD. 99.3 Compromise Settlement Agreement between S/M Real Estate Fund VII, Ltd. and Federal National Mortgage Association, dated May 6, 1996. Reference is made to Exhibit 99.1 to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 filed with the Securities and Exchange Commission. 99.4 $5,830,000 Multifamily Note and Addendum, dated May 30, 1996. Reference is made to Exhibit 99.2 to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 filed with the Securities and Exchange Commission. 99.5 $681,142 Subordinate Multifamily Note and Addendum, dated May 30, 1996. Reference is made to Exhibit 99.3 to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 filed with the Securities and Exchange Commission. 99.6 $6,400,000 Promissory Note, dated December 3, 1998. Reference is made to Exhibit 99.1 of the Partnership's Form 8-K filed with the Securities and Exchange Commission on December 14, 1998. 99.7 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.8 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended September 30, 2002. 9 S/M REAL ESTATE FUND VII, LTD. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. S/M REAL ESTATE FUND VII, LTD. BY: SM7 APARTMENT INVESTORS INC. General Partner Date: November 12, 2002 BY: /s/ Richard E. Hoffmann --------------------------- Name: Richard E. Hoffmann Title: Chief Executive Officer, Director, President and Treasurer Date: November 12, 2002 BY: /s/ Sandy Robison --------------------------- Name: Sandy Robison Title: Chief Financial Officer, Vice President, Secretary and Controller 10 S/M REAL ESTATE FUND VII, LTD. CERTIFICATIONS I, Richard E. Hoffmann, certify that: 1. I have reviewed this quarterly report on Form 10-Q of S/M Real Estate Fund VII, Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect our ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in our internal controls; 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. S/M REAL ESTATE FUND VII, LTD. BY: SM7 APARTMENT INVESTORS INC. General Partner Date: November 12, 2002 BY: /s/ Richard E. Hoffmann --------------------------- Name: Richard E. Hoffmann Title: Chief Executive Officer, Director, President and Treasurer 11 S/M REAL ESTATE FUND VII, LTD. CERTIFICATIONS I, Sandy Robison, certify that: 1. I have reviewed this quarterly report on Form 10-Q of S/M Real Estate Fund VII, Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect our ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in our internal controls; 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. S/M REAL ESTATE FUND VII, LTD. BY: SM7 APARTMENT INVESTORS INC. General Partner Date: November 12, 2002 BY: /s/ Sandy Robison --------------------------- Name: Sandy Robison Title: Chief Financial Officer, Vice President, Secretary and Controller 12 S/M REAL ESTATE FUND VII, LTD. INDEX TO EXHIBITS

13 S/M REAL ESTATE FUND VII, LTD. INDEX TO EXHIBITS (continued)

S/M REAL ESTATE FUND VII LTD/TX 10-Q