<PAGE> 1
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 MARCH 31, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the Transition period from to
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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
of incorporation of organization) 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
--- ---
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S/M REAL ESTATE FUND VII LTD.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS AT MARCH 31, AT DECEMBER 31,
1999 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 962,216 $ 962,216
Building and improvements 7,751,580 7,707,214
-------------------------------------
8,713,796 8,669,430
Less accumulated depreciation (5,686,279) (5,587,802)
-------------------------------------
3,027,517 3,081,628
Cash and cash equivalents 203,463 274,735
Cash held in escrow 87,292 35,987
Restricted cash - replacement reserve 126,090 114,375
Accounts receivable 3,529 6,311
Other assets 63,897 72,108
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,511,788 $ 3,585,144
===========================================================================================================================
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
First mortgage note payable $ 6,384,660 $ 6,400,000
Accounts payable:
Trade 35,900 13,374
Affiliates 43,731 60,070
Accrued expenses and other liabilities 74,565 52,796
-------------------------------------
Total Liabilities 6,538,856 6,526,240
-------------------------------------
Partners' Deficit:
General Partners (116,883) (116,023)
Limited Partners (11,080 units outstanding) (2,910,185) (2,825,073)
-------------------------------------
Total Partners' Deficit (3,027,068) (2,941,096)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 3,511,788 $ 3,585,144
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENT OF PARTNERS' DEFICIT (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 GENERAL LIMITED
PARTNERS PARTNERS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ (116,023) $ (2,825,073) $ (2,941,096)
Net loss (860) (85,112) (85,972)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $ (116,883) $ (2,910,185) $ (3,027,068)
===========================================================================================================================
</TABLE>
See accompanying notes to the financial statements. 2
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S/M REAL ESTATE FUND VII LTD.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME
Rental $ 326,448 $ 332,646
Interest and other 2,994 2,841
------------------------------------
Total Income 329,442 335,487
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 173,344 170,348
Interest 114,468 153,611
Depreciation and amortization 100,005 93,729
General and administrative 27,597 23,888
------------------------------------
Total Expenses 415,414 441,576
- ----------------------------------------------------------------------------------------------------------------
NET LOSS $ (85,972) $ (106,089)
================================================================================================================
NET LOSS ALLOCATED:
To the General Partners $ (860) $ (1,061)
To the Limited Partners (85,112) (105,028)
- ----------------------------------------------------------------------------------------------------------------
$ (85,972) $ (106,089)
================================================================================================================
PER LIMITED PARTNERSHIP UNIT
(11,080 OUTSTANDING) $ (7.68) $ (9.48)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements. 3
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S/M REAL ESTATE FUND VII LTD.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (85,972) $ (106,089)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 100,005 93,729
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Cash held in escrow (51,305) 88,699
Accounts receivable 2,782 547
Other assets 6,683 8,357
Accounts payable 6,187 6,993
Accrued expenses and other liabilities 21,769 (99,371)
-------------------------------------
Net cash provided by (used in) operating activities 149 (7,135)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash - replacement reserve (11,715) (12,375)
Additions to real estate (44,366) --
-------------------------------------
Net cash used in investing activities (56,081) (12,375)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on first mortgage note payable (15,340) (15,864)
Amortization of discount on second mortgage note payable -- 2,081
-------------------------------------
Net cash used in financing activities (15,340) (13,783)
- -----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (71,272) (33,293)
Cash and cash equivalents, beginning of period 274,735 209,924
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 203,463 $ 176,631
=================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 114,468 $ 153,611
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements. 4
<PAGE> 5
S/M REAL ESTATE FUND VII, LTD.
NOTES TO THE FINANCIAL STATEMENTS
The unaudited financial statements should be read in conjunction with S/M Real
Estate Fund VII, Ltd.'s (the "Partnership") annual 1998 audited financial
statements within Form 10-K.
The unaudited financial statements include all normal and recurring adjustments
which are, in the opinion of management, necessary to present a fair statement
of financial position as of March 31, 1999 and the results of operations for the
three months ended March 31, 1999 and 1998, cash flows for the three months
ended March 31, 1999 and 1998, and the statement of partners' deficit for the
three months ended March 31, 1999. 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 1998, and no
material contingencies exist which would require disclosure in this interim
report per Regulation S-X, Rule 10-01, Paragraph (a)(5).
During the three months ended March 31, 1999 and 1998, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property management fees, in the amounts of $2,193 and $669,
respectively. Management fees earned were $13,169 and $13,412 for the three
months ended March 31, 1999 and 1998, respectively.
5
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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
In order to improve the financial condition of the Partnership and provide much
needed funds for exterior improvements on Fifth Avenue, on December 3, 1998, the
Partnership refinanced the mortgage note payable on Fifth Avenue (the
"Refinancing"). In accordance with the terms of the Loan Agreement between the
Partnership and General Electric Capital Corporation (the "Loan Agreement"), the
principal balance of the original mortgage totaling $6,400,000 is due January 1,
2009 and bears interest at a rate of 7.16% (the "New First Mortgage"). The
previous first and second mortgage (the "Previous Mortgage") had a combined
balance of $6,259,810 at an average interest rate of 8.97%. In spite of having a
slightly higher principal loan amount, the Partnership reduced the total debt
service payments in 1999 from $689,572 to $519,231, a reduction of $170,341.
Under the terms of the New First Mortgage with General Electric Capital
Corporation (the "Lender"), the Partnership is required to make fixed monthly
payments of principal and interest in the amount of $43,269 commencing on
February 1, 1999 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 was required to deposit certain amounts into
escrow for the completion of certain required repairs to Fifth Avenue.
Cash and cash equivalents totaled $203,463 at March 31, 1999, compared to
$274,735 at December 31, 1998. The $71,272 decrease is primarily attributable to
cash used for additions to real estate.
Cash held in escrow increased to $87,292 at March 31, 1999 from $35,987 at
December 31, 1998. The $51,305 increase is primarily attributable to
contributions to the insurance and real estate tax escrow, as required in the
Partnership's Loan Agreement.
Restricted cash - replacement reserve increased to $126,090 at March 31, 1999,
from $114,375 at December 31, 1998. The $11,715 increase is primarily
attributable to contributions to the replacement reserve in accordance with the
terms of the Loan Agreement.
Other assets decreased from $72,108 at December 31, 1998, to $63,897 at March
31, 1999. The decrease is primarily due to a decrease in prepaid insurance.
Accounts receivable totaled $3,529 at March 31, 1999, compared to $6,311 at
December 31, 1998. The decrease is primarily attributable to the timing of
tenant rental receipts. Accounts payable totaled $79,631 at March 31, 1999,
compared to $73,444 at December 31, 1998. The increase is primarily attributable
to the timing of payments associated with fixed asset expenditures, repairs and
maintenance for apartment preparation and administrative expenses.
Accrued expenses and other liabilities totaled $74,565 at March 31, 1999,
compared to $52,796 at December 31, 1998. The change is primarily attributable
to the timing of payments for real estate taxes, audit and tax fees, and
administrative costs.
As a result of the recent Refinancing and anticipated reductions in general and
administrative expenses, the General Partners currently expect funds from
operations to pay all obligations for 1999, 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
Results of operations resulted in a net loss of $85,972 for the three-month
period ended March 31, 1999, compared with a net loss of $106,089 for the
three-month period ended March 31, 1998. The decrease from 1998 to 1999 is
primarily attributable to a decrease in interest expense associated with the
Refinancing in December 1998.
Rental income totaled $326,448 for the three-month period ended March 31, 1999,
compared with $332,646 for the three-month period ended March 31, 1998. The
decrease is due primarily to lower average occupancy at Fifth Avenue. Occupancy
at Fifth Avenue averaged approximately 92% for the three-month period ended
6
<PAGE> 7
S/M REAL ESTATE FUND VII, LTD.
March 31, 1999, compared to approximately 95% for the corresponding period in
1998. The average rental income per occupied square foot at Fifth Avenue was
$8.45 for the three-month period ended March 31, 1999, compared to $8.25 for the
corresponding period in 1998.
Total expenses for the three-month period ended March 31, 1999 were $415,414
compared to $441,576 for the three-month period ended March 31, 1998. The
decrease is due to a decrease in interest expense, which was partially offset by
increases in all other expense areas.
Property operating expenses consisted 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-month period ended March 31, 1999 were $173,344 compared to
$170,348 for the three-month period ended March 31, 1998. The increase is
primarily attributable to higher repair and maintenance costs for apartment
preparation, which was partially offset by lower real estate taxes.
Interest expense totaled $114,468 for the three-month period ended March 31,
1999, compared to $153,611 for the three-month period ended March 31, 1998. The
decrease is primarily attributable to the Refinancing in December 1998 described
above.
General and administrative expenses for the three-month period ended March 31,
1999 were $27,597 compared to $23,888 for the three-month period ended March 31,
1998. The increase is due primarily to higher legal fees.
Year 2000 Issues
The Partnership recognized that the arrival of the Year 2000 poses a unique
challenge to the ability of an information technology system and non-information
technology systems to recognize the date change from December 31, 1999 to
January 1, 2000. Through March 31, 1999, the Partnership has assessed and made
certain changes to provide for continued functionality of its systems and has
evaluated the readiness of the Partnership's external entities, such as vendors,
customers, payment systems and others. Due to the nature and extent of the
Partnership's operations that are potentially affected by Year 2000 issues, the
Partnership does not believe that Year 2000 issues will have a material adverse
effect on the business operation or the financial performance of the
Partnership. There can be no assurance, however, that Year 2000 issues will not
adversely effect the Partnership or its business. The Partnership believes that
the cost to make appropriate changes to its internal and external systems will
not be significant and that such costs will be funded completely through
operations.
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, 1998.
7
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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 -
2a 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 Form
10-K filed with the Securities and
Exchange Commission on June 14, 1989.
2b 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 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.
10a 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 for the year ended
December 31, 1989 filed with the
Securities and Exchange Commission May 15,
1990.
10b Loan Agreement between S/M Real Estate
Fund VII, Ltd. and General Electric
Capital Corporation, dated December 3,
1998. (Incorporated by reference from
Exhibit 10.1 of the Registrant's Form 8-K
filed with the Securities and Exchange
Commission on December 14, 1998).
27 Financial Data Schedule. Filed herewith.
28a 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
of the Registrant's Form 10-K filed with
the Securities and Exchange Commission on
May 12, 1988.
28b 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 of the
Registrant's Form 10-K filed with the
Securities and Exchange Commission on May
12, 1988.
8
<PAGE> 9
99a Compromise Settlement Agreement between
S/M Real Estate Fund VII, Ltd. and Federal
National Mortgage Association, dated May
6, 1996. (Incorporated by reference from
Exhibit 99.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1996).
99b $5,830,000 Multifamily Note and Addendum,
dated May 30, 1996. (Incorporated by
reference from Exhibit 99.2 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
99c $681,142 Subordinate Multifamily Note and
Addendum, dated May 30, 1996.
(Incorporated by reference from Exhibit
99.3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June
30, 1996).
99d $6,400,000 Promissory Note, dated December
3, 1998. (Incorporated by reference from
Exhibit 99.1 of the Registrant'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 March 31, 1999.
9
<PAGE> 10
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.
A General Partner
Date: May 12, 1999 BY: /s/ Richard E. Hoffmann
---------------------------------
Name: Richard E. Hoffmann
Title: Director, President and Treasurer
BY: MURRAY REALTY INVESTORS VII, INC.
A General Partner
Date: May 12, 1999 BY: /s/ Charles W. Karlen
---------------------------------
Name: Charles W. Karlen
Title: Vice President
<PAGE> 11
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Document
Number Description
- -------- -----------
<S> <C>
2a 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 Form 10-K filed with
the Securities and Exchange Commission on June 14, 1989.
2b 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 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.
10a 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 for the year ended December 31, 1989 filed
with the Securities and Exchange Commission May 15, 1990.
10b 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 the Registrant's Form 8-K
filed with the Securities and Exchange Commission on December
14, 1998.
27 Financial Data Schedule.
28a 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 of the Registrant's Form 10-K filed with the
Securities and Exchange Commission on May 12, 1988.
28b 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 of the
Registrant's Form 10-K filed with the Securities and Exchange
Commission on May 12, 1988.
99a 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 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 filed with the Securities and Exchange Commission.
99b $5,830,000 Multifamily Note and Addendum, dated May 30, 1996.
Reference is made to Exhibit 99.2 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 filed with the Securities and Exchange Commission.
99c $681,142 Subordinate Multifamily Note and Addendum, dated May
30, 1996. Reference is made to Exhibit 99.3 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 filed with the Securities and Exchange
Commission.
99d $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.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 416,845
<SECURITIES> 0
<RECEIVABLES> 3,529
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,897
<PP&E> 8,713,796
<DEPRECIATION> 5,686,279
<TOTAL-ASSETS> 3,511,788
<CURRENT-LIABILITIES> 154,196
<BONDS> 6,384,660
0
0
<COMMON> 0
<OTHER-SE> (3,027,068)
<TOTAL-LIABILITY-AND-EQUITY> 3,511,788
<SALES> 326,448
<TOTAL-REVENUES> 329,442
<CGS> 0
<TOTAL-COSTS> 173,344
<OTHER-EXPENSES> 127,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,468
<INCOME-PRETAX> (85,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> (85,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (85,972)
<EPS-PRIMARY> (7.68)
<EPS-DILUTED> (7.68)
</TABLE>