10-Q 1 d10443e10vq.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, 2003 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 (I.R.S. Employer Identification No.) of incorporation of organization) 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 [X] S/M REAL ESTATE FUND VII, LTD.

See accompanying notes to the financial statements. 2 S/M REAL ESTATE FUND VII, LTD.

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

See accompanying notes to the financial statements. 4 S/M REAL ESTATE FUND VII, LTD. 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, 2003, the results of operations for the three and nine months ended September 30, 2003 and 2002, the change in partners' deficit for the nine months ended September 30, 2003, and the cash flows for the nine months ended September 30, 2003 and 2002. Results of operations for the period are not necessarily indicative of the results to be expected for the full year. 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, 2003 and 2002, the general partners or their affiliates were reimbursed for Partnership administrative and operating expenses, excluding property management fees, in the amounts of $8,069 and $8,891, respectively. Property management fees earned by an affiliate of the Partnership's general partners were $43,220 and $42,604 for the nine months ended September 30, 2003 and 2002, respectively. The financial information included in this interim report as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 has been prepared by management without audit by independent certified public accountants. The Partnership's 2002 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. No significant events other than mentioned below have occurred subsequent to fiscal year 2002, and no material contingencies exist which would require disclosure in this interim report per Regulation S-X, Rule 10-01, Paragraph (a)(5). On July 3, 2003, the Partnership filed with the Securities and Exchange Commission preliminary proxy materials and on September 16, 2003, the Partnership filed with the Securities and Exchange Commission definitive proxy materials regarding a proposed sale of the Partnership's sole property and the dissolution and liquidation of the Partnership. Definitive proxy materials were sent to limited partners seeking their approval of these proposals. On October 23, 2003, the Partnership held a special meeting of limited partners to vote on two proposals described in the definitive proxy materials dated September 16, 2003: (1) the sale of the Partnership's final property, Fifth Avenue Apartments, and amendments of the Partnership's partnership agreement to disband the Investment Committee and to change the allocation of cash distributions from sales or refinancings among limited partners and general partners; and (2) the subsequent dissolution and liquidation of the Partnership. Limited partnerships representing a quorum were present at the special meeting. Both proposals were approved by the requisite number of limited partnership interests. As a result, the Partnership began marketing the Fifth Avenue property for sale and continues to operate until such time as the property is sold and the Partnership is dissolved and liquidated. Despite these approvals, there can be no assurance that the Partnership will consummate the sale and the dissolution and liquidation of the Partnership. In accordance with the provisions of SFAS 144, the Fifth Avenue property will be disclosed as held for sale in future financial statements and depreciation ceased subsequent to the approval of the sale of the Fifth Avenue property. 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, 2003, the balance in this replacement reserve account was $11,918. Cash and cash equivalents totaled $142,883 at September 30, 2003, compared to $259,663 at December 31, 2002. The $116,780 decrease is primarily attributable to cash used by operations, debt service payments and payments made to the replacement reserve account and escrow account, partially offset by the release of restricted cash (see below). Cash held in escrow increased to $231,073 at September 30, 2003, from $82,565 at December 31, 2002. The $148,508 increase is attributable to contributions to the insurance and real estate tax escrow as required by the Partnership's loan agreement offset in part by payment of annual insurance premiums. Restricted cash replacement reserve decreased to $11,918 at September 30, 2003, from $24,156 at December 31, 2002. The $12,238 decrease is attributable to the release of $47,531 for replacements, offset in part by monthly contributions to the replacements reserve in accordance with the terms of the loan agreement. Other assets increased to $109,640 at September 30, 2003, from $89,380 at December 31, 2002. The increase is primarily due to increases in prepaid insurance partially offset by the amortization of loan costs. Accounts receivable totaled $4,947 at September 30, 2003, compared to $10,133 at December 31, 2002. The decrease is primarily attributable to the timing of tenant rental receipts. Accounts payable totaled $80,114 at September 30, 2003, compared to $61,759 at December 31, 2002. The increase is primarily attributable to the timing of payments for utilities and repair and maintenance costs. Accrued expenses and other liabilities totaled $227,193 at September 30, 2003, compared to $43,405 at December 31, 2002. The increase 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 2003, 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 any such deficits. Results of Operations Operations resulted in net losses of $154,946 and $386,010 for the three and nine-month periods ended September 30, 2003, respectively, and $93,819 and $199,304 for the three and nine-month periods ended September 30, 2002, respectively. The increased net loss for the three and nine-months ended September 30, 2003 from the corresponding periods in 2002 are primarily attributable to increases in property operating expenses and partnership administrative costs. Rental income totaled $367,198 and $1,070,163 for the three and nine-month periods ended September 30, 2003, respectively, compared to $340,705 and $1,060,860, respectively, for the corresponding periods in 2002. Occupancy at Fifth Avenue averaged approximately 97% and 94% for the three and nine-month periods ended September 30, 2003, respectively, compared to 94% and 95% for the three and nine-month periods ended September 30, 2002, respectively. The average rental income per occupied square foot at Fifth Avenue was $11.52 and $9.74 for the three and nine months ended September 30, 2003, respectively, compared to $8.59 and $8.75, respectively, for the corresponding periods in 2002. 6 S/M REAL ESTATE FUND VII, LTD. Total expenses for the three and nine-month periods ended September 30, 2003 were $523,422 and $1,459,868, respectively, compared to $436,192 and $1,264,477, respectively, for the three and nine-month periods ended September 30, 2002. The increases are primarily attributable to increases in property operating expenses and general and administrative expenses. 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, 2003 were $230,345 and $642,142, respectively, compared to $199,063 and $553,107, respectively, for the three and nine-month periods ended September 30, 2002. The increases are primarily attributable to higher apartment preparation costs, repair and maintenance costs, leasing and promotional costs, property office administrative costs and property insurance costs. General and administrative expenses for the three and nine-month periods ended September 30, 2003 were $74,736 and $165,269, respectively, compared to $16,936 and $51,577, respectively, for the three and nine-month periods ended September 30, 2002. The increases are primarily due to higher legal and other professional expenses primarily associated with the filing and distribution of the definitive proxy materials as discussed below. On July 3, 2003, the Partnership filed with the Securities and Exchange Commission preliminary proxy materials and on September 16, 2003, the Partnership filed with the Securities and Exchange Commission definitive proxy materials regarding a proposed sale of the Partnership's sole property and the dissolution and liquidation of the Partnership. Definitive proxy materials were sent to limited partners seeking their approval of these proposals. On October 23, 2003, the Partnership held a special meeting of limited partners to vote on two proposals described in the definitive proxy materials dated September 16, 2003: (1) the sale of the Partnership's final property, Fifth Avenue Apartments, and amendments of the Partnership's partnership agreement to disband the Investment Committee and to change the allocation of cash distributions from sales or refinancings among limited partners and general partners; and (2) the subsequent dissolution and liquidation of the Partnership. Limited partnerships representing a quorum were present at the special meeting. Both proposals were approved by the requisite number of limited partnership interests. As a result, the Partnership began marketing the Fifth Avenue property for sale and continues to operate until such time as the property is sold and the Partnership is dissolved and liquidated. Despite these approvals, there can be no assurance that the Partnership will consummate the sale and the dissolution and liquidation of the Partnership. In accordance with the provisions of SFAS 144, the Fifth Avenue property will be disclosed as held for sale in future financial statements and depreciation ceased subsequent to the approval of the sale of the Fifth Avenue property. 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, 2002. 7 S/M REAL ESTATE FUND VII, LTD. PART I, ITEM 4. CONTROLS AND PROCEDURES As of September 30, 2003, 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 (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2003 to provide reasonable assurance that information required to be disclosed by us in our periodic SEC Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and to provide reasonable assurance that information required to be disclosed by us is accumulated and communicated to our management, including the chief executive officer and chief financial officer of our general partners, as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 8 S/M REAL ESTATE FUND VII, LTD. PART II OTHER INFORMATION ITEMS 1-3 AND 5 Not applicable. ITEM 4 Submission of Matters to a Vote of Security Holders. On October 23, 2003, the Partnership held a special meeting of limited partners to consider and approve two proposals described in the definitive proxy materials mailed to limited partners on or about September 16, 2003: (1) the sale of the Partnership's sole property, and amendments to the Partnership's partnership agreement to disband the Investment Committee and change the allocation of certain distributions; and (2) the subsequent dissolution and liquidation of the Partnership. With respect to proposal 1, 5,990 limited partner interests voted for the proposal, 285 voted against and 82 were abstentions or broker non-votes. With respect to proposal 2, 6,064 limited partner interest voted for the proposal, 211 voted against and 82 were abstentions or broker non-votes. 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. 9 S/M REAL ESTATE FUND VII, LTD. 31.1* Section 302 Certification of Chief Executive Officer. 31.2* Section 302 Certification of Chief Financial Officer. 32.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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. 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. (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended September 30, 2003. --------------------- * Filed herewith. 10 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 13, 2003 BY: /s/ Richard E. Hoffmann ------------------------------- Name: Richard E. Hoffmann Title: Chief Executive Officer, Director, President and Treasurer Date: November 13, 2003 BY: /s/ Sandy Robison ------------------------------- Name: Sandy Robison Title: Chief Financial Officer, Vice President, Secretary and Controller 11 S/M REAL ESTATE FUND VII, LTD. INDEX TO EXHIBITS Document Number Description 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 on 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. 31.1 Section 302 Certification of Chief Executive Officer 31.2 Section 302 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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 Form 10-K filed with the Securities and Exchange Commission on May 12, 1988. 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. 12 S/M REAL ESTATE FUND VII, LTD. INDEX TO EXHIBITS (continued) Document Number Description 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 Registrant's Form 8-K filed with the Securities and Exchange Commission on December 14, 1998. 13

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