1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended SEPTEMBER 30, 1997 Commission File Number 2-84816 REAL ESTATE ASSOCIATES LIMITED VII (A California Limited Partnership) I.R.S. Employer Identification No. 95-3290316 9090 WILSHIRE BLVD., SUITE 201 BEVERLY HILLS, CALIF. 90211 Registrant's Telephone Number, Including Area Code (310) 278-2191 Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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[ ] 2 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, September 30, 1997 and December 31, 1996 ........1 Statements of Operations, Nine and Three Months Ended September 30, 1997 and 1996 ...2 Statement of Partners' Deficiency, Nine Months Ended September 30, 1997 ......................3 Statements of Cash Flows, Nine Months Ended September 30, 1997 and 1996 .............4 Notes to Financial Statements ...................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation ........................9 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................10 Item 6. Exhibits and Reports on Form 8-K.............................10 Signatures............................................................11 3 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 ASSETS 1997 1996 (Unaudited) (Audited) ------------- ------------- INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 16,764,277 $ 17,873,759 CASH 350,383 342,631 OTHER ASSETS 105,129 105,129 ------------ ------------ TOTAL ASSETS $ 17,219,789 $ 18,321,519 ============ ============ LIABILITIES AND PARTNERS' DEFICIENCY LIABILITIES: Notes payable (Note 3) $ 24,869,501 $ 24,869,501 Accrued interest payable (Note 3) 25,566,447 24,393,044 Accrued fees and expenses due general partner (Note 4) 3,576,584 3,213,854 Account payable and other liabilities 27,308 22,582 ------------ ------------ 54,039,840 52,498,981 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 4 and 5) PARTNERS' DEFICIENCY: General partners (691,331) (664,905) Limited partners (36,128,720) (33,512,557) ------------ ------------ (36,820,051) (34,177,462) ------------ ------------ TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 17,219,789 $ 18,321,519 ============ ============ The accompanying notes are an integral part of these financial statements. 1 4 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1996 ------------- -------------- -------------- --------------- INTEREST INCOME $ 11,744 $ 4,486 $ 13,643 $ 4,330 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Interest expense 1,758,594 586,198 1,742,569 580,856 Management fees - general partner 557,730 185,910 557,730 185,910 General and administrative 93,834 33,165 66,078 21,023 Legal and accounting 122,962 44,958 64,720 1,535 ----------- ----------- ----------- ----------- 2,533,120 850,231 2,431,097 789,324 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (2,521,376) (845,745) (2,417,454) (784,994) DISTRIBUTIONS FROM LIMITED PARTNERSHIPS RECOGNIZED AS INCOME (Note 2) 46,787 6,000 57,515 -- EQUITY IN LOSS OF LIMITED PARTNERSHIPS AND AMORTIZATION OF ACQUISITION COSTS (168,000) (56,000) (99,000) (33,000) ----------- ----------- ----------- ----------- NET LOSS $(2,642,589) $ (895,745) $(2,458,939) $ (817,994) =========== =========== =========== =========== NET LOSS PER LIMITED PARTNERSHIP INTEREST $ (127) $ (42) $ (118) $ (37) =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENT OF PARTNERS' DEFICIENCY NINE MONTHS ENDED SEPTEMBER 30, 1997 (Unaudited) General Limited Partners Partners Total ----------- ------------- ------------- PARTNERSHIP INTERESTS September 30, 1997 20,802 ============ PARTNERS' DEFICIENCY at January 1, 1997 $ (664,905) $(33,512,557) $(34,177,462) Net loss for the nine months ended September 30, 1997 (26,426) (2,616,163) (2,642,589) ------------ ------------ ------------ PARTNERS' DEFICIENCY, September 30, 1997 $ (691,331) $(36,128,720) $(36,820,051) ============ ============ ============ The accompanying notes are an integral part of these financial statements. 3 6 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) 1997 1996 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,651,218) $(2,458,939) Adjustments to reconcile net loss to net cash used in operating activities: Equity in loss of limited partnerships and amortization of additional basis and acquisition costs 168,000 99,000 Increase in accrued interest payable 1,173,403 1,387,243 Increase in accrued fees and expenses due general partner 362,730 397,729 Increase (decrease) in accounts payable and other liabilities 13,355 (12,930) ----------- ----------- Net cash used in operating activities (933,730) (587,897) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Distributions from limited partnerships recognized as a return of capital 941,482 483,809 ----------- ----------- NET INCREASE (DECREASE) IN CASH 7,752 (104,088) CASH, BEGINNING OF PERIOD 342,631 352,652 ----------- ----------- CASH, END OF PERIOD $ 350,383 $ 248,564 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 585,191 $ 355,326 =========== =========== The accompanying notes are an integral part of these financial statements. 4 7 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The information contained in the following notes to the financial statements is condensed from that which would appear in the annual financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the Annual Report for the year ended December 31, 1996 prepared by Real Estate Associates Limited VII (the "Partnership"). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. In the opinion of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals), necessary to present fairly the financial position of he Partnership at September 30, 1997, and the results of operations for the nine and three months then ended and changes in cash flows for the nine months then ended. The general partners have a 1 percent interest in profits and losses of the Partnership. The limited partners have the remaining 99 percent interest which is allocated in proportion to their respective individual investments. National Partnership Investments Corp. (NAPICO) is the corporate general partner of the Partnership. USES OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS The investment in limited partnerships is accounted for on the equity method. Acquisition, selection and other costs related to the acquisition of the projects were capitalized as part of the investment account and are being amortized on a straight line basis over the estimated lines of the underlying assets, which is generally 30 years. NET LOSS PER LIMITED PARTNERSHIP INTEREST Net loss per limited partnership interest was computed by dividing the limited partners' share of net loss by the number of limited partnership interests outstanding during the year. The number of limited partnership interests was 20,802 for the periods presented. 5 8 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH The Partnership has its cash on deposit primarily with one high credit quality financial institution. Such cash is in excess of the FDIC insurance limit. INCOME TAXES No provision has been made for income taxes in the accompanying financial statements since such taxes, if any, are the liability of the individual partners. IMPAIRMENT OF LONG-LIVED ASSETS The Partnership adopted Statement of Financial Accounting Standards No. 121, Account for the Improvement of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of as of January 1, 1996 without a significant effect on its financial statements. The Partnership reviews long-lived assets to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS The Partnership holds limited partnership interests in 32 limited partnerships. In addition, the Partnership holds a general partner interest in REA IV, NAPICO is also the general partner in REA IV. REA IV, in turn, holds limited partner interests in 16 additional limited partnerships. In total, therefore, the Partnership holds interests, either directly or indirectly through REA IV, in 48 partnerships all of which own residential rental projects consisting of 4,731 apartment units. The mortgage loans of these projects are insured by various governmental agencies. The Partnership, as a limited partner, is entitled to between 98 percent and 99 percent of the profits and losses in the limited partnerships it has invested in directly. The Partnership is also entitled to 99 percent of the profits and losses of REA IV. REA IV holds a 99 percent interest in each of the limited partnerships in which it has invested. Equity in losses of limited partnerships is recognized in the financial statements until the limited partnership investment account is reduced to a zero balance. Losses incurred after the limited partnership investment account is reduced to zero are not recognized. Distributions from the limited partnerships are accounted for as a return of capital until the investment balance is reduced to zero. Subsequent distributions received are recognized as income. 6 9 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) The following is a summary of the investment in limited partnerships for the nine months ended September 30, 1997: Balance, beginning of period $ 17,873,759 Cash distributions recognized as a return of capital (941,482) Amortization of acquisition costs (144,000) Equity in loss of limited partnerships (24,000) ------------ Balance, end of period $ 16,764,277 ============ The following are unaudited combined estimated statements of operations for the nine months ended September 30, 1997 and 1996 for the limited partnerships in which the Partnership has investments: Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1996 ------------ ------------ ------------ ------------ Revenues: Rental and other $ 20,892,000 $ 6,964,000 $ 20,358,000 $ 6,786,000 Expenses: Depreciation 4,104,000 1,368,000 4,047,000 1,349,000 Interest 3,051,000 1,017,000 3,129,000 1,043,000 Operating 14,985,000 4,995,000 14,400,000 4,800,000 ------------ ------------ ------------ ------------ 22,140,000 7,380,000 21,575,000 7,192,000 ------------ ------------ ------------ ------------ Net loss $ (1,248,000) $ (416,000) $ (1,218,000) $ (406,000) ============ ============ ============ ============ NAPICO, or one of its affiliates, is the general partner and property management agent for certain of the limited partnerships included above. The Partnership is undergoing an extensive review of disposition, refinancing or re-engineering alternatives for the properties in which it has invested. The Partnership has began to incur expenses in connection with this review by various third party professionals, which amounted to $36,224 for the nine months ended September 30, 1997. 7 10 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 3 - NOTES PAYABLE Certain of the Partnership's investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnership. The Partnership is obligated on non-recourse notes payable of $24,869,501, bearing interest at 9 1/2 percent, to the sellers of the Partnership interests. The notes have principal maturity dates ranging from December 1999 to December 2002 or upon sale or refinancing of the underlying partnership properties. These obligations are collateralized by the Partnership's investments in the investee partnerships and are payable out of cash distributions from the investee partnerships, as defined in the notes. Unpaid interest is due at maturity of the notes. NOTE 4 - ACCRUED FEES AND EXPENSES DUE GENERAL PARTNER Under the terms of the Restated Certificate and Agreement of Limited Partnership, the Partnership is obligated to NAPICO for an annual management fee equal to .5 percent of the invested assets of the partnerships. Invested assets is defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership's interests in the capital accounts of the respective partnerships. The fee was approximately $558,000 for the nine months ended September 30, 1997 and 1996. The Partnership reimburses NAPICO for certain expenses. The reimbursement to NAPICO was approximately $32,500 and $32,600 for the nine months ended September 30, 1997 and 1996, respectively, and is included in administrative expenses. NOTE 5 - CONTINGENCIES The corporate general partner of the Partnership and the Partnership are involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management, and the corporate general partner, the claims will not result in any material liability to the Partnership. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, when it is practicable to estimate that value. The notes payable are collateralized by the Partnership's investments in investee limited partnerships and are payable only out of cash distributions from the investee partnerships. The operations generated by the investee limited partnerships, which account for the Partnership's primary source of revenues, are subject to various government rules, regulations and restrictions which make it impracticable to estimate the fair value of the notes payable and related accrued interest and amounts due general partner. The carrying amount of other assets and liabilities reported on the balance sheets that require such disclosure approximates fair value due to their short-term maturity. 8 11 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary sources of funds include interest income earned from investing available cash and distributions from limited partnerships in which the Partnership has invested. It is not expected that any of the local limited partnerships in which the Partnership has invested will generate cash flow sufficient to provide for distributions to limited partners in any material amount. RESULTS OF OPERATIONS Partnership revenues consist primarily of interest income earned on certificates of deposit and other temporary investment of funds not required for investment in local partnerships. Operating expenses consist primarily of recurring general and administrative expenses and professional fees for services rendered to the Partnership. In addition, an annual Partnership management fee in an amount equal to .5 percent of invested assets is payable to the corporate general partner. The Partnership is undergoing an extensive review of disposition, refinancing or re-engineering alternatives for the properties in which it has invested. The Partnership has began to incur expenses in connection with this review by various third party professionals, which amounted to $36,224 for the nine months ended September 30, 1997. The Partnership accounts for its investments in the local limited partnerships on the equity method, thereby adjusting its investment balance by its proportionate share of the income or loss of the local limited partnerships. Losses incurred after the limited partnership account is reduced to zero are not recognized. Distributions received from limited partnerships are recognized as return of capital until the investment balance has been reduced to zero or to a negative amount equal to future capital contributions required. Subsequent distributions received are recognized as income. Except for certificates of deposit and money market funds, the Partnership's investments are entirely interests in other limited and general partnerships owning government assisted projects. Available cash is invested in money market funds and certificates of deposit which provide interest income as reflected in the statement of operations. These temporary investments can be easily converted to cash to meet obligations as they arise. The Partnership intends to continue investing available funds in this manner. 9 12 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Partnership's Corporate General Partner is involved in various lawsuits, including the following related to REAL VII: John Mitchell v. Oakwood Apartments, NAPICO et al., Case No. 94CV112108, Court of Common Pleas, Lorain County, Ohio. On March 31, 1994, the Plaintiff filed a lawsuit alleging that on May 5, 1992, while returning to his apartment (Oakwood Apartments, Lorain, Ohio) he tripped and sustained mental and physical injuries. The Plaintiff voluntarily dismissed his action and a Notice of Voluntary Dismissal without prejudice was filed. The Plaintiff, however, refiled the action which remains pending. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No exhibits are required per the provision of Item 7 of regulation S-K. 10 13 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 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. REAL ESTATE ASSOCIATES LIMITED VII (a California limited partnership) By: National Partnership Investments Corp. General Partner ------------------------------------------------ Bruce Nelson President Date: ----------------------------------------------- ------------------------------------------------ Charles H. Boxenbaum Chief Executive Officer Date: ----------------------------------------------- 11