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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 JUNE 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
--- ---
S/M REAL ESTATE FUND VII, LTD.
================================================================================
BALANCE SHEETS
AT JUNE 30, AT DECEMBER 31,
2002 2001
(UNAUDITED)
------------- ---------------
ASSETS
Real estate, at cost:
Land $ 962,216 $ 962,216
Building and improvements 7,949,770 7,971,336
------------- -------------
8,911,986 8,933,552
Less accumulated depreciation (6,893,967) (6,724,462)
------------- -------------
2,018,019 2,209,090
Cash and cash equivalents 323,927 216,234
Cash held in escrow 151,058 53,049
Restricted cash - replacement reserve 12,180 106,371
Accounts receivable 10,237 3,846
Other assets, net 85,886 57,859
------------- -------------
TOTAL ASSETS $ 2,601,307 $ 2,646,449
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
First mortgage note payable $ 6,182,377 $ 6,218,682
Accounts payable:
Trade 18,757 13,470
Affiliates 40,665 40,665
Accrued expenses and other liabilities 131,352 39,991
------------- -------------
Total Liabilities 6,373,151 6,312,808
------------- -------------
Partners' Deficit:
General Partners (124,330) (123,275)
Limited Partners (11,080 units outstanding) (3,647,514) (3,543,084)
------------- -------------
Total Partners' Deficit (3,771,844) (3,666,359)
------------- -------------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 2,601,307 $ 2,646,449
============= =============
STATEMENT OF PARTNERS' DEFICIT (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
------------- ------------- -------------
BALANCE AT DECEMBER 31, 2001 $ (123,275) $ (3,543,084) $ (3,666,359)
Net loss (1,055) (104,430) (105,485)
------------- ------------- -------------
BALANCE AT JUNE 30, 2002 $ (124,330) $ (3,647,514) $ (3,771,844)
============= ============= =============
See accompanying notes to the financial statements. 2
S/M REAL ESTATE FUND VII, LTD.
================================================================================
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
INCOME
Rental $ 364,378 $ 355,507 $ 720,155 $ 717,734
Interest and other 1,068 4,230 2,645 7,566
------------ ------------ ------------ ------------
Total Income 365,446 359,737 722,800 725,290
------------ ------------ ------------ ------------
EXPENSES
Property operating 172,785 162,974 354,044 330,743
Interest 112,108 113,318 223,311 225,697
Depreciation and amortization 108,128 107,914 216,289 216,994
General and administrative 21,474 17,889 34,641 38,002
------------ ------------ ------------ ------------
Total Expenses 414,495 402,095 828,285 811,436
------------ ------------ ------------ ------------
NET LOSS $ (49,049) $ (42,358) $ (105,485) $ (86,136)
============ ============ ============ ============
NET LOSS ALLOCATED:
To the General Partners $ (490) $ (424) $ (1,055) $ (861)
To the Limited Partners (48,559) (41,934) (104,430) (85,275)
------------ ------------ ------------ ------------
$ (49,049) $ (42,358) $ (105,485) $ (86,136)
============ ============ ============ ============
PER LIMITED PARTNERSHIP UNIT
(11,080 OUTSTANDING) $ (4.38) $ (3.78) $ (9.43) $ (7.70)
============ ============ ============ ============
See accompanying notes to the financial statements. 3
S/M REAL ESTATE FUND VII, LTD.
================================================================================
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (105,485) $ (86,136)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 216,289 216,994
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Cash held in escrow (98,009) (105,072)
Accounts receivable (6,391) 1,434
Other assets (31,083) (16,887)
Accounts payable 5,287 31,658
Accrued expenses and other liabilities 91,361 72,658
------------- -------------
Net cash provided by operating activities 71,969 114,649
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash - replacement reserve 94,191 (25,374)
Additions to real estate (22,162) (16,386)
------------- -------------
Net cash provided by (used in) investing activities 72,029 (41,760)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES - Payments of principal
on first mortgage note payable (36,305) (33,919)
------------- -------------
Net increase in cash and cash equivalents 107,693 38,970
Cash and cash equivalents, beginning of period 216,234 136,606
------------- -------------
Cash and cash equivalents, end of period $ 323,927 $ 175,576
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 223,311 $ 225,697
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building and improvements $ 43,728 $ 10,123
============= =============
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 June 30, 2002, the results of operations for the three
and six months ended June 30, 2002 and 2001, the change in partners' deficit for
the six months ended June 30, 2002, and the cash flows for the six months ended
June 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 six months ended June 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
$5,771 and $5,336, respectively. Property management fees earned by an affiliate
of the Partnership's general partners were $28,829 and $28,638 for the six
months ended June 30, 2002 and 2001, respectively.
The financial information included in this interim report as of June 30, 2002
and for the three and six months ended June 30, 2002 and 2001 has been prepared
by management without audit by independent and 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.
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 June 30, 2002, the balance in
this replacement reserve account was $12,180.
Cash and cash equivalents totaled $323,927 at June 30, 2002, compared to
$216,234 at December 31, 2001. The $107,693 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 $151,058 at June 30, 2002, from $53,049 at
December 31, 2001. The $98,009 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 $12,180 at June 30, 2002, from
$106,371 at December 31, 2001. The $94,191 decrease is attributable to the
release of $118,068 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 $85,886 at June 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 $10,237 at June 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 $18,757 at June 30, 2002,
compared to $13,470 at December 31, 2001.
Accrued expenses and other liabilities totaled $131,352 at June 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 $49,049 and $105,485 for the three and
six-month periods ended June 30, 2002, respectively, compared with net losses of
$42,358 and $86,136 for the three and six-month periods ended June 30, 2001,
respectively. The increased net loss for the three and six-months ended June 30,
2002 from the corresponding periods in 2001 are primarily attributable to
increases in property operating expenses.
Rental income totaled $364,378 and $720,155 for the three and six-month periods
ended June 30, 2002, respectively, compared to $355,507 and $717,734,
respectively, for the corresponding periods in 2001. Occupancy at Fifth Avenue
averaged approximately 97% and 96% for the three and six-month periods ended
June 30, 2002, respectively, compared to 95% for both the three and six-month
periods ended June 30, 2001, respectively. The average rental income per
occupied square foot at Fifth Avenue was $8.91 and $8.83 for the three and six
months ended June 30, 2002, respectively, compared to $8.93 and $8.96,
respectively, for the corresponding periods in 2001.
6
S/M REAL ESTATE FUND VII, LTD.
Total expenses for the three and six-month periods ended June 30, 2002 were
$414,495 and $828,285, respectively, compared to $402,095 and $811,436,
respectively, for the three and six-month periods ended June 30, 2001. The
increases for the three and six-months ended June 30, 2002 from the
corresponding periods in 2001 are primarily attributable to increases in
property operating 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 six-month periods ended June 30, 2002 were $172,785 and
$354,044, respectively, compared to $162,974 and $330,743, respectively, for the
three and six-month periods ended June 30, 2001. The increases for the 2002
periods primarily are attributable to higher utility costs, property insurance
costs and real estate taxes.
General and administrative expenses for the three and six-month periods ended
June 30, 2002 were $21,474 and $34,641, respectively, compared to $17,889 and
$38,002, respectively, for the three and six-month periods ended June 30, 2001.
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.
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 June 30, 2002.
9
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: August 9, 2002 BY: /s/ Richard E. Hoffmann
----------------------------
Name: Richard E. Hoffmann
Title: Director, President
and Treasurer
Date: August 9, 2002 BY: /s/ Sandy Robison
----------------------------
Name: Sandy Robison
Title: Chief Financial Officer,
Vice President,
Secretary and Controller
10
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.
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.
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.
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.
11