UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 2001 ------------------------------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ----------------- ---------------- Commission File number 0-14377 ------------------------------ Krupp Realty Limited Partnership-VII - ------------------------------------------------------------------------------- Massachusetts 04-2842924 - ------------------------------------------- --------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation or organization One Beacon Street, Boston, Massachusetts 02108 - ------------------------------------------- --------------------------------- (Address of principal executive (Zip code) offices) (Registrant's telephone number, including area code) (617) 523-7722 -------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Investor Limited Partner Interest 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 preceeding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of voting securities held by non-affiliates: Not Applicable. Documents incorporated by reference: Part IV, Item 14. The exhibit index is located on pages 11-12. The total number of pages in this document is 30. PART I This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. ITEM 1. BUSINESS Krupp Realty Limited Partnership-VII ("KRLP-VII") was formed on August 21, 1984 by filing a Certificate of Limited Partnership in the Commonwealth of Massachusetts. KRLP-VII issued all of the General Partner Interests to two General Partners, The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership-II, a Massachusetts limited partnership. KRLP-VII also issued all of the Original Limited Partner Interests to The Krupp Company Limited Partnership-II. On November 2, 1984, KRLP-VII commenced an offering of up to 40,000 units of Investor Limited Partner Interest (the "Units") for $1,000 per Unit. The public offering was closed on April 25, 1986, at which time 27,184 Units had been sold. For additional details, see Note A to Consolidated Financial Statements included in Item 8 (Appendix A) of this report. The primary business of KRLP-VII is to invest in, operate, refinance and ultimately dispose of a diversified portfolio of residential real estate. KRLP-VII considers itself to be engaged in only one industry segment, investment in real estate. On December 19, 1984 the General Partners formed Krupp Realty Courtyards Limited Partnership ("Realty-VII") as a prerequisite for the refinancing of Courtyards Village East Apartments ("Courtyards Village"). At the same time, the General Partners transferred ownership of Courtyards Village to Realty-VII. The General Partner of Realty-VII is KRLP-VII. The Limited Partners of Realty-VII are KRLP-VII and The Krupp Corporation ("Krupp Corp."). Krupp Corp. has beneficially assigned its interest in Realty-VII to KRLP-VII. On March 31, 1994, the General Partners formed Windsor Partners Limited Partnership ("Windsor L.P.") as a prerequisite for the refinancing of Windsor Apartments. At the same time, the General Partners transferred ownership of the property to Windsor L.P. In exchange for the property, KRLP-VII received 99% Limited Partnership interest in Windsor L.P. The General Partner of Windsor L.P. is ST. Windsor Corporation, which has a 1% interest in Windsor L.P. and is 100% owned by KRLP-VII. KRLP-VII, Realty-VII and Windsor L.P. are collectively known as Krupp Realty Limited Partnership-VII and Subsidiaries (collectively referred to herein as the "Partnership"). On August 29, 2001, the Partnership sold Courtyards Village East Apartments ("Courtyards"), a 224-unit multi-family apartment community located in Naperville, Illinois, to an unaffiliated third party (see Note E to Consolidated Financial Statements, included in Item 8 (Appendix A) of this report). On November 20, 2001, the Partnership sold Windsor Apartments ("Windsor"), a 300-unit apartment community located in Garland, Texas, to an unaffiliated third party (see Note E to Consolidated Financial Statements, included in Item 8 (Appendix A) of this report). The future performance of the Partnership will depend upon factors which cannot be predicted. Such factors include general economic, both on a national basis and in those areas where the Partnership's real estate investments were located, liquidation expenses, government regulations and federal and state income tax laws as well as the ultimate settlement of contingent liabilities associated with the sale of certain of the Partnerships real estate investments.. The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the Partnership's operations, and no adverse effect therefrom is anticipated in the future. As of December 31, 2001, the Partnership has no investment in any multi-family apartment communities (see Note E). As of December 31, 2001, the Partnership did not employ any personnel. 2 ITEM 2. PROPERTIES As of December 31, 2001, the Partnership has no investment in any multi-family apartment communities. A summary of the Partnership's real estate investments as of December 31, 2001 is presented below. Schedule III included in Item 8 (Appendix A) to this report contains additional detailed information with respect to individual properties. Average Occupancy For the Year Ended December 31, Year of Total ------------------------------------ Description Acquisition Units 2001 2000 1999 1998 1997 - ----------------------- ----------- ----- ------ ------ ------ ------ ------ Courtyards Village East Apartments Naperville, Illinois 1985 224 N/A 95% 95% 97% 97% Windsor Apartments Garland, Texas 1984 300 N/A 95% 96% 97% 96% ----- 524 Units ===== ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 3 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The transfer of Units is subject to certain limitations contained in the Partnership Agreement. There is no public market for the Units and it is not anticipated that any such public market will develop. The number of Investor Limited Partners as of December 31, 2001 was approximately 1,260. One of the objectives of the Partnership is to generate cash available for distribution. In 1999 and thereafter, the semiannual distributions were paid at an annual rate of $18.28 per Unit. In 2001, the Partnership distributed $218.80 per Unit with the proceeds received from the sale of Courtyards. Pursuant to the Partnership Agreement, distributions from capital transactions, such as the sale of Courtyards, are allocated 99% to Investor Limited Partners and 1% to the General Partners. For details, see Note H to Consolidated Financial Statements included in Item 8 (Appendix A) of this report. The Partnership made the following distributions to its Partners during the years ended December 31, 2001 and 2000: Year Ended December 31, ---------------------------------------------- 2001 2000 ---------------------- ---------------------- Amount Per Unit Amount Per Unit ---------- ---------- ---------- ---------- Limited Partners: Investor Limited Partners (27,184 Units outstanding) $6,444,825 $ 237.08 $ 496,852 $ 18.28 Original Limited Partner 44,150 44,164 General Partners 71,120 11,042 ---------- ---------- $6,560,095 $ 552,058 ========== ========== 4 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be used in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto, which are included in Items 7 and 8 of this report, respectively. 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- $ 3,370,568 $ 4,202,751 $ 3,997,617 $ 3,989,189 $ 4,795,059 Total revenue Loss before gain on sale of property and extraordinary loss (347,038) (279,488) (549,227) (298,630) (151,137) Gain on sale of property 17,780,327 - - 676,316 - Extraordinary loss from early extinguishment of debt (90,922) - - - - Net income (loss) 17,342,367 (279,488) (549,227) 377,686 (151,137) Net income (loss) allocated to: Investor Limited Partners 16,243,960 (276,693) (543,735) 373,909 (149,626) Per Unit 597.56 (10.18) (20.00) 13.75 (5.50) Original Limited Partner 614,081 - - - - General Partners 484,326 (2,795) (5,492) 3,777 (1,511) Total assets at December 31, 9,045,723 8,985,092 9,837,297 10,974,526 17,995,610 Long-term obligations at December 31, - 5,028,109 10,108,246 10,220,786 14,345,624 Distributions: Investor Limited Partners 6,444,825 496,852 496,853 2,885,312 543,679 Per Unit 237.08 18.28 18.28 106.14 20.00 Original Limited Partner 44,150 44,164 44,165 48,327 48,327 General Partners 71,120 11,042 11,041 35,460 12,082 Operating results for the periods presented are not comparable due to the sale of Nora Corners on January 30, 1998, the sale of Courtyards on August 29, 2001, and the sale of Windsor on November 20, 2001. The per Unit distributions for the years ended December 31, 2001, 2000, 1999, 1998, and 1997 and were $237.08, $18.28, $18.28, $106.14, and $20.00, respectively, of which $218.80 and $86.14 represented a return of capital in 2001 and 1998, respectively. Prior performance of the Partnership is not necessarily indicative of future operations. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources On November 20, 2001, the Partnership sold Windsor, a 300-unit multi-family apartment community to an unaffiliated third party. The Partnership received $12,235,336, net of closing costs of $80,518 and payoff of mortgage payable and accrued interest of $4,971,598. On August 29, 2001, the Partnership sold Courtyards, a 224-unit multi-family apartment complex to an unaffiliated third party. The Partnership received $7,608,399 for the sale, net of closing costs of $83,648 and debt of $5,075,953 assumed by the buyer, and repaid the mortgage note payable and accrued interest of $30,106. As of December 31, 2001, the Partnership has no investment in any multi-family apartment communities. Operations The following discussion relates to the operations of the Partnership and its properties (Courtyards Village and Windsor Apartments) for the years ended December 31, 2001, 2000, and 1999. The sale of Courtyards Village and Windsor Apartments as of December 31, 2001 significantly impacts the comparability of the Partnership's operations between these periods. 2001 compared to 2000 Net income increased in 2001 when compared to 2000 as a result of the Partnership recognizing a gain on the sale of its remaining real estate assets. Total expenses decreased in 2001 when compared to 2000 due to the Partnership's sale of its remaining real estate assets in August and November. General and administrative costs increased as a result of increased investor communication costs, including copying and mailing investor letters and annual reports. 2000 compared to 1999 Net loss decreased in 2000 when compared 1999 as total revenue increased and total expenses decreased. The increase in total revenue is primarily a result of rental rate increases implemented at all of the Partnership's properties at the end of the first quarter of 2000. Interest income decreased in 2000 due to a lower average cash and cash equivalent balances available for investment when compared to 1999. Total expenses for 2000 decreased when compared to 1999. Depreciation expense decreased as fixed asset additions purchased in the previous years became fully depreciated. Maintenance expenses decreased in 2000 as capital expenditures reduced the need for repairs and maintenance in some areas. Operating expenses increased primarily as a result of increases in leasing, utilities, and insurance costs. 6 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership's future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Partnership manages its market risk by matching projected cash inflows from operating activities, investing activities and financing activities with projected cash outflows to fund debt payments, acquisitions, capital expenditures, distributions and other cash requirements. All of the Partnership's debt has been repaid as of December 31, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedule appearing on Page F-2 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Information as to the directors and executive officers of The Krupp Corporation, which is a General Partner of KRLP-VII, and The Krupp Company Limited Partnership-II, the other General Partner of KRLP-VII, is as follows: Name and Age Position with The Krupp Corporation ------------------- ------------------------------------ Douglas Krupp (55) Co-Chairman of the Board George Krupp (57) Co-Chairman of the Board Frank Apeseche (44) President David C. Quade (58) Treasurer and Executive Vice President Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, mortgage banking, investment sponsorship, venture capital investing and financial management. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969 and he has served as the Chief Executive Officer since 1992. Mr. Krupp serves as a member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989 and was elected trustee in 1990. George Krupp, the brother of Douglas Krupp, is the Co-Founder and Co-Chairman of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, mortgage banking, investment sponsorship, venture capital investing and financial management. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish High School in Waltham, Massachusetts since September of 1997. Mr. Krupp attended the University of Pennsylvania and Harvard University and holds a Master's Degree in History from Brown University. Frank Apeseche is the President of The Berkshire Group. Mr. Apeseche joined The Berkshire Group in 1986. He served as Chief Financial Officer and Chief Planning Officer from 1992 to 1995. Mr. Apeseche was the founding Managing Partner of BG Affiliates, a private equity investment firm. Prior to joining The Berkshire Group, Mr. Apeseche served as a manager with Andersen Consulting where he specialized in providing technology solutions to Fortune 500 clients. Mr. Apeseche received a BA with distinction from Cornell University and an MBA with Honors from the University of Michigan. David C. Quade is the Treasurer and Executive Vice President of The Berkshire Group. Mr. Quade joined The Berkshire Group in 1998. Prior to joining The Berkshire Group, he was a Principal and Executive V.P./CFO at Leggat McCall Properties for eighteen years. At Leggatt McCall, Mr. Quade had extensive experience in business strategic planning, financial workouts, funds management, and corporate financing regarding asset management. Prior to that, Mr. Quade worked in senior financial capacities for two NYSE companies, North American Mortgage Investors and Equitable Life Mortgage & Realty Investors, and he also worked at Coopers & Lybrand. He has a P.A.P. from the Northwestern University Graduate School of Business, and a B.S. degree and a Master's degree in Business Administration from Central Michigan University. ITEM 11. EXECUTIVE COMPENSATION The Partnership has no directors or executive officers. 8 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of February 15, 2002, beneficial owners of record owning more than 5% of the Partnership's 27,184 outstanding Units were as follows: Title Name and Address Amount and Nature Percent of Of Of of Class Beneficial Owner Beneficial Ownership Class - --------- ------------------------------------- -------------------- ---------- Investor Equity Resources Group, Incorporated 1,664.00 Units (1) 6.12% Limited Partner 14 Story Street Units Cambridge, MA 02138 Investor Madison Avenue Investment Partners, LLC Limited Partner P.O. Box 7533 1,812.90 Units(2)(3) 6.70% Units Incline Village, NV 89452 Investor First Equity Realty, LLC Limited Partner 555 Fifth Avenue, 9th Floor 1,812.90 Units(2)(4) 6.70% Units New York, NY 10017 Investor The Harmony Group II, LLC Limited Partner P.O. Box 7533 1,812.90 Units(2)(5) 6.70% Units Incline Village, NV 89452 Investor Ronald M. Dickerman Limited Partner 555 Fifth Avenue, 9th Floor 1,812.90 Units(2)(6) 6.70% Units New York, NY 10017 Investor Bryan E. Gordon Limited Partner P.O. Box 7533 1,812.90 Units(2)(7) 6.70% Units Incline Village, NV 89542 (1) According to the statement on Schedule 13D originally filed on April 3, 1996 by Equity Resources Group, Incorporated, Equity Resource Cambridge Fund Limited Partnership, Equity Resource General Fund Limited Partnership, Equity Resource Brattle Fund Limited Partnership, Equity Resource Fund XV Limited Partnership, Equity Resource Fund XVI Limited Partnership, Equity Resource Fund XVII Limited Partnership, Equity Resource Fund XVIII Limited Partnership, Equity Resource Fund XIX Limited Partnership, James E. Brooks, Mark S. Thompson and Eggert Dagbjartsson, as amended by Amendment No. 1 thereto dated December 12, 1996 and Amendment No. 2 thereto dated April 21, 1997, Equity Resources Group, Incorporated, James E. Brooks, Mark S. Thompson and Eggert Dagbjartsson, in their capacities as General Partners of each of Equity Resource Cambridge Fund Limited Partnership, Equity Resource General Fund Limited Partnership, Equity Resource Brattle Fund Limited Partnership, Equity Resource Fund XV Limited Partnership, Equity Resource Fund XVI Limited Partnership, Equity Resource Fund XVII Limited Partnership, Equity Resource Fund XVIII Limited Partnership and Equity Resource Fund XIX Limited Partnership, respectively, share the power to vote or direct the vote and to dispose of or direct the disposition of 1,664 units. (2) According to the statement on Schedule 13G originally filed on February 9, 2000 by Madison Avenue Investment Partners, LLC ("MAIP"), Madison Value Fund, LLC ("MVF"), Madison Investment Partners 11, LLC ("MIP 11"), Madison Investment Partners 10 ("MIP 10"), First Equity Realty, LLC ("First Equity"), The Harmony Group II, LLC ("Harmony"), Ronald M. Dickerman and Bryan E. Gordon (collectively, the "Reporting Persons"), as amended by Amendment No. 1 therto dated February 9, 2001 and Amendment No. 2 thereto dated February 14, 2002 (as amended, the "Madison Schedule 13G"), each of MAIP, First Equity, Harmony Group and Reporting Persons may be deemed to constitute a "group" within the meaning of Section 13(d)(3) of the Exchange Act. According to the Amended Madison Schedule 13G, MAIP is the controlling person of various entities that are the nominee owners of, or the successors by merger to the assets of nominee owners of, Units of Limited Partner Interest (the "Units") of the Issuer. As stated in the Amended Madison Schedule 13G, these nominees, none of which beneficially own 5% or more of the Units, are Madison/AG 9 Value Partners III, Cobble Hill Investments, L.P., Madison/WP Value Fund IV, LLC, Madison/WP Value Fund V, Madison Liquidity Investors 100, LLC, Madison Liquidity Investors 103, LLC, Madision Liquidity Investors 111, LLC, and Madison Liquidity Investors 107, LLC. Madison Liquidity Investors 112, LLC is the nominee holder of approximately 0.5% of the Units and is controlled by MVF. According to the Madison Schedule 13G, the controlling members of MAIP are First Equity, of which Mr. Dickerman is the Managing Member, and Harmony, of which Mr. Gordon is the Managing Member. The controlling member of MVF is MIP 11. The controlling member of MIP 11 is MAIP. The controlling member of MIP 10 is MAIP. (3) According to the Madison Schedule 13G, Madison Avenue Investment Partners, LLC has sole voting and dispositive power with respect to 1,812.90 units of the Partnership. (4) According to the Madison Schedule 13G, First Equity Realty, LLC has shared voting and dispositive power with respect to 1,812.90 units of the Partnership. (5) According to the Madison Schedule 13G, The Harmony Group II, LLC has shared voting and dispositive power with respect to 1,812.90 units of the Partnership. (6) According to the Madison Schedule 13G, Ronald M. Dickerman has shared voting and dispositive power with respect to 1,812.90 units of the Partnership. (7) According to the Madison Schedule 13G, Bryan E. Gordon has shared voting and dispositive power with respect to 1,812.90 units of the Partnership. The only interests held by management or its affiliates consist of its General Partner and Original Limited Partner Interests. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership does not have any directors, executive officers or nominees for election as director. Please see Note I to the Consolidated Financial Statements (Appendix A). 10 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements - see Index to Consolidated Financial Statements and Schedule included under Item 8 (Appendix A), on page F-2 to this report. 2. Consolidated Financial Statement Schedules - see Index to Consolidated Financial Statements and Schedule included under Item 8 (Appendix A), on page F-2 to this report. All other schedules are omitted as they are not applicable or not required or the information is provided in the Consolidated Financial Statements or the Notes thereto. (b) Reports on Form 8-K On December 5, 2001, the Partnership filed Form 8-K regarding the sale of Windsor Apartments. (c) Exhibits: Number and Description Under Regulation S-K The following reflects all applicable exhibits required under Item 601 of Regulation S-K: (4) Instruments defining the rights of security holders including indentures: (4.1)Amended Agreement of Limited Partnership dated as of October 23, 1984 [Exhibit A to Prospectus included in Registrant's Registration Statement on Form S-11 (File 2-92889)].* (4.2)Thirty-Second Amendment and Restatement of Certificate of Limited Partnership filed with the Massachusetts Secretary of State on June 4, 1986 [Exhibit 4.2 to Registrant's Report on Form 10-K dated October 31, 1986 (File No. 0-14377)].* (10) Material Contracts Windsor Apartments (10.1) Purchase and Sale Agreement dated June 3, 1983 between Douglas Krupp, on behalf of himself and others, and Garland Land Joint Venture [Exhibit 1 to Registrant's Report on Form 8-K dated December 27, 1984 (File No. 2-92889)].* (10.2) Property Management Agreement, dated December 27, 1984 between Krupp Realty Limited Partnership-VII, as Owner and BRI OP Limited Partnership, formerly known as Berkshire Property Management, a subsidiary of Berkshire Realty Company, Inc. [Exhibit 10.4 to Registrant's Report on Form 10-K for the fiscal year ended October 31, 1984 (File No. 2-92889)].* (10.3) Promissory Note dated April 13, 1994 by and between Windsor Partners Limited Partnership and Sun Life Insurance Company of America [Exhibit 10.1 to Registrant's Report on Form 10-Q dated June 30, 1994 (File No. 0-14377)].* (10.4) Deed of Trust, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents dated April 13, 1994 from the grantor, Windsor Partners Limited Partnership, to the Trustee, Brian C. Rider [Exhibit 10.2 to Registrant's Report on Form 10-Q dated June 30, 1994 (File No. 0-14377)].* 11 Courtyards Village East Apartments (10.5) Purchase and Sale Agreement dated October 12, 1984 between Douglas Krupp on behalf of himself and others, and The Courtyards Village and The Courtyards Village Inn-East Apartments Partnership [Exhibit 1 to Registrant's Report on Form 8-K dated April 1, 1985 (File 2-92889)].* (10.6) Amended Trust Agreement dated May 6, 1976 between The Courtyards Village and The Courtyards Village Inn-East Apartments Partnership and American National Bank and Trust Company of Chicago [Exhibit 2 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.7) Assignment of Trust of American National Bank and Trust Company of Chicago dated April 1, 1985 [Exhibit 3 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.8) Mortgage Note dated January 1, 1973 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Company [Exhibit 4 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.9) Modification Agreement dated May 1, 1975 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Corporation. [Exhibit 5 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.10) Mortgage Note dated May 18, 1976 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Company [Exhibit 6 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.11) Mortgage Agreement dated May 18, 1976 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Corporation [Exhibit 7 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.12) Amended HUD Regulatory Agreement dated May 18, 1976 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Corporation [Exhibit 8 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.13) Consolidation Agreement dated June 14, 1976 between American Bank and Trust Company of Chicago, as Trustee, and Republic Realty Mortgage Corporation [Exhibit 9 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].* (10.14) Property Management Agreement, dated April 1, 1985 between Krupp Realty Limited Partnership-VII, as Owner and BRI OP Limited Partnership, formerly known as Berkshire Property Management, an affiliate of Berkshire Realty Company, Inc. [Exhibit 10.20 to Registrant's Report on Form 10-K for the year ended October 31, 1985 (File No. 2-92889)].* (10.15) Promissory Note dated July 30, 1997 between American National Bank and Trust Company of Chicago and Reilly Mortgage Group, Inc.* (10.16) Multifamily Mortgage, Assignment of Rents, and Security Agreement dated July 30, 1997 between American National Bank and Trust Company of Chicago and Reilly Mortgage Group, Inc.* * Incorporated by reference 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 1st day of April, 2002. Krupp Realty Limited Partnership-VII ---------------------------------------- (Registrant) BY: The Krupp Corporation, a General Partner ---------------------------------------- BY: /s/ Douglas Krupp ---------------------------------------- Douglas Krupp Co-Chairman (Principal Executive Officer) and Director of The Krupp Corporation Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 1st day of April, 2002. Signatures Titles /s/ Douglas Krupp Co-Chairman (Principal Executive Officer) - ----------------------------------- and Director of The Krupp Corporation,a Douglas Krupp General Partner. /s/ George Krupp Co-Chairman (Principal Executive Officer) - ----------------------------------- and Director of the Krupp Corporation, a George Krupp General Partner. /s/ Frank Apeseche President of the Krupp Corporation, a - ----------------------------------- General Partner. Frank Apeseche /s/ David Quade Treasurer (Principal Financial and - ----------------------------------- Accounting Officer) of the Krupp David Quade Corporation, a General Partner. 13 APPENDIX A KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE ITEM 8 OF FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 2001 F-1 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Accountants F-3 Consolidated Balance Sheets at December 31, 2001 and December 31, 2000 F-4 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999 F-5 - F-6 Consolidated Statements of Changes in Partners' Equity (Deficit) for the Years Ended December 31, 2001, 2000 and 1999 F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 F-8 Notes to Consolidated Financial Statements F-9 - F-16 Schedule III - Real Estate and Accumulated Depreciation F-17 All other schedules are omitted as they are not applicable, not required, or the information is provided in the consolidated financial statements or the notes thereto. F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Realty Limited Partnership-VII and Subsidiaries: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Krupp Realty Limited Partnership-VII and Subsidiaries (the "Partnership") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note A, the Partnership implemented a liquidation plan to dispose of the remaining real estate assets of the Partnership. At December 31, 2001, the Partnership has completed its disposition of its real estate assets and expects to complete the liquidation and dissolution of the Partnership in 2002. As such, at December 31, 2001, the Partnership has adopted the liquidation basis of accounting. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 26, 2002 F-3 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Liquidation) December 31, 2001 and 2000 ASSETS 2001 2000 ------------- ------------- Multi-family apartment complexes, net of accumulated depreciation of $0 and $15,671,250, respectively (Note F) $ - $ 7,766,297 Cash and cash equivalents (Note C) 8,968,487 456,851 Cash restricted for tenant security deposits - 27,800 Replacement reserve escrow (Note F) - 56,043 Due from affiliates (Note I) 28,737 31,115 Prepaid expenses and other assets 48,499 476,014 Investment in securities - 65,340 Deferred expenses, net of accumulated amortization of $0 and $210,020, respectively - 105,632 ------------- ------------- Total assets $ 9,045,723 $ 8,985,092 ============= ============= LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Liabilities: Mortgage notes payable (Notes E and F) $ - $ 10,107,446 Accrued expenses and other liabilities (Note G) 103,342 717,537 ------------- ------------- Total liabilities 103,342 10,824,983 Commitment (Note H) Partners' equity (deficit) (Note H): Investor Limited Partners (27,184 Units outstanding) 8,852,957 (946,178) Original Limited Partner - (569,931) General Partners 89,424 (323,782) ------------- ------------- Total partners' equity (deficit) 8,942,381 (1,839,891) ------------- ------------- Total liabilities and partners' equity (deficit) $ 9,045,723 $ 8,985,092 ============= ============= The accompanying notes are an integral part of the consolidated financial statements. F-4 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Liquidation) For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ------------ ------------ ------------ Revenue: Rental $ 3,312,178 $ 4,184,217 $ 3,970,170 Interest income 58,390 18,534 27,447 ------------ ------------ ------------ Total revenue 3,370,568 4,202,751 3,997,617 ------------ ------------ ------------ Expenses: Operating (Notes E and I) 892,526 1,045,932 1,010,972 Maintenance 294,118 321,259 341,331 Real estate taxes 367,532 418,345 428,806 General and administrative (Note I) 282,316 197,064 176,664 Management fees (Note I) 166,052 185,038 157,467 Depreciation and amortization 1,013,097 1,444,361 1,552,134 Interest (Note F) 701,965 870,240 879,470 ------------ ------------ ------------ Total expenses 3,717,606 4,482,239 4,546,844 Loss before gain on sale of properties and extraordinary loss from early extinguishment of debt (347,038) (279,488) (549,227) Gain on sale of properties (Note E) 17,780,327 - - ------------ ------------ ------------ Income (loss) before extraordinary loss from early extinguishment of debt 17,433,289 (279,488) (549,227) Extraordinary loss from early extinguishment of debt (90,922) - - ------------ ------------ ------------ Net income (loss) (Note J) $ 17,342,367 $ (279,488) $ (549,227) ============ ============ ============ Continued The accompanying notes are an integral part of the consolidated financial statements. F-5 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Liquidation), Continued For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ------------ ------------ ------------ Allocation of net income (loss) (Note H): Investor Limited Partners (27,184 Units outstanding): Loss before gain on sale of properties and extraordinary loss $ (1,268,551) $ (276,693) $ (543,735) Gain on sale of properties 17,602,524 - - Extraordinary loss from early extinguishment of debt (90,013) - - ------------ ------------ ------------ Net income (loss) $ 16,243,960 $ (276,693) $ (543,735) ============ ============ ============ Investor Limited Partners, Per Unit: Loss before gain on sale of properties and extraordinary loss $ (46.66) $ (10.18) $ (20.00) Gain on sale of properties 647.53 - - Extraordinary loss from early extinguishment of debt (3.31) - - ------------ ------------ ------------ Net income (loss) $ 597.56 $ (10.18) $ (20.00) ============ ============ ============ Original Limited Partner: Loss before gain on sale of properties and extraordinary loss $ 614,081 $ - $ - Gain on sale of properties - - - Extraordinary loss from early extinguishment of debt - - - ------------ ------------ ------------ Net income (loss) $ 614,081 $ - $ - ============ ============ ============ General Partners: Loss before gain on sale of properties and extraordinary loss $ 307,432 $ (2,795) $ (5,492) Gain on sale of properties 177,803 - - Extraordinary loss from early extinguishment of debt (909) - - ------------ ------------ ------------ Net income (loss) $ 484,326 $ (2,795) $ (5,492) ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-6 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'EQUITY (DEFICIT) (In Liquidation) For the Years Ended December 31, 2001, 2000 and 1999 Total Investor Original Partners' Limited Limited General Equity/ Partners Partner Partners (Deficit) ----------- ----------- ------------ ------------ Balance at December 31, 1998 $ 867,955 $ (481,602) $ (293,412) $ 92,941 Net loss (543,735) - (5,492) (549,227) Distributions (496,853) (44,165) (11,041) (552,059) ----------- ----------- ------------ ------------ Balance at December 31, 1999 (172,633) (525,767) (309,945) (1,008,345) Net loss (276,693) - (2,795) (279,488) Distributions (496,852) (44,164) (11,042) (552,058) ----------- ----------- ------------ ------------ Balance at December 31, 2000 (946,178) (569,931) (323,782) (1,839,891) Net income 16,243,960 614,081 484,326 17,342,367 Distributions (6,444,825) (44,150) (71,120) (6,560,095) ----------- ----------- ------------ ------------ Balance at December 31, 2001 $ 8,852,957 $ - $ 89,424 $ 8,942,381 =========== =========== ============ ============ The per Unit distributions for each of the years ended December 31, 2001, 2000 and 1999 was $237.08, $18.28 and $18.28 , respectively, of which $218.80, $0 and $0 represented a return of capital, respectively. The accompanying notes are an integral part of the consolidated financial statements. F-7 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Liquidation) For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 17,342,367 $ (279,488) $ (549,227) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,013,097 1,444,361 1,552,133 Gain on sale of properties (17,780,327) - - Extraordinary loss from early retirement of debt 90,922 - - Impairment of securities 65,340 - - Changes in assets and liabilities: Decrease (increase) in restricted cash for tenant security deposits 27,800 (544) (650) Decrease (increase) in prepaid expenses and other assets and due from affiliates 429,893 155,895 (59,107) Increase (decrease) in accrued expenses and other liabilities (614,195) 28,811 68,729 Interest earned on replacement reserve escrow - (787) (1,023) ------------ ------------ ------------ Net cash provided by operating activities 574,897 1,348,248 1,010,855 ------------ ------------ ------------ Cash flows from investing activities: Deposits to replacement reserve escrow (29,922) (50,400) (50,400) Withdrawals from replacement reserve escrow 85,965 67,522 205 Additions to fixed assets (371,451) (362,176) (812,887) Decrease in accrued expenses and other liabilities related to fixed asset additions - (2,204) (1,296) Proceeds from sale of property, net 19,843,735 - - ------------ ------------ ------------ Net cash provided by (used in) investing activities 19,528,327 (347,258) (864,378) ------------ ------------ ------------ Cash flows from financing activities: Principal payments on mortgage notes payable (86,478) (112,606) (103,376) Repayment of mortgage notes payable (4,945,015) - - Distributions (6,560,095) (552,058) (552,059) ------------ ------------ ------------ Net cash used in financing activities (11,591,588) (664,664) (655,435) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 8,511,636 336,326 (508,958) Cash and cash equivalents, beginning of year 456,851 120,525 629,483 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 8,968,487 $ 456,851 $ 120,525 ============ ============ ============ Non-cash investing and financing activities: Investment in securities $ - $ 65,340 $ - Assumption of mortgage note payable $ (5,075,953) $ - $ - The accompanying notes are an integral part of the consolidated financial statements. F-8 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Liquidation) ---------- A. Organization Krupp Realty Limited Partnership-VII ("KRLP-VII") was formed on August 21, 1984 by filing a Certificate of Limited Partnership in the Commonwealth of Massachusetts. KRLP-VII terminates on December 31, 2025 unless earlier terminated upon the occurrence of certain events as set forth in the Partnership Agreement. KRLP-VII issued all of the General Partner Interests to two General Partners, The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership-II, a Massachusetts limited partnership, in exchange for capital contributions aggregating $1,000. In addition, the General Partners were required to make additional capital contributions of $135,891 which were used to pay organization and offering costs in excess of 5% of the gross proceeds of the offering. Except under certain limited circumstances upon termination of KRLP-VII, the General Partners are not required to make any other additional capital contributions. KRLP-VII also issued all of the Original Limited Partner Interests to The Krupp Company Limited Partnership-II in exchange for a capital contribution of $4,000. On November 2, 1984, KRLP-VII commenced an offering of up to 40,000 units of Investor Limited Partner Interest (the "Units") for $1,000 per Unit. The public offering was closed on April 25, 1986, at which time 27,184 Units had been sold for $27,184,000. On December 19, 1984 the General Partners formed Krupp Realty Courtyards Limited Partnership ("Realty-VII") as a prerequisite for the refinancing of Courtyards Village East Apartments ("Courtyards Village"). At the same time, the General Partners transferred ownership of Courtyards Village to Realty-VII. The General Partner of Realty-VII is KRLP-VII. The Limited Partners of Realty-VII are KRLP-VII and The Krupp Corporation ("Krupp Corp."). Krupp Corp. has beneficially assigned its interest in Realty-VII to KRLP-VII. On March 31, 1994, the General Partners formed Windsor Partners Limited Partnership ("Windsor L.P.") as a prerequisite for the refinancing of Windsor Apartments. At the same time, the General Partners transferred ownership of the property to Windsor L.P. In exchange for the property, KRLP-VII received a 99% Limited Partnership interest in Windsor L.P. The General Partner of Windsor L.P. is ST. Windsor Corporation which has a 1% interest in Windsor L.P. and is 100% owned by KRLP-VII. KRLP-VII, Realty-VII and Windsor L.P. are collectively known as Krupp Realty Limited Partnership-VII and Subsidiaries (collectively referred to herein as the "Partnership"). As described in Note E, the Partnership sold its remaining real estate investments in 2001 and intends to liquidate the Partnership's remaining assets, distribute its remaining cash and dissolve the Partnership in 2002. Continued F-9 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued ---------- B. Significant Accounting Policies The Partnership uses the following accounting policies for financial reporting purposes, which may differ in certain respects from those used for federal income tax purposes (see Note J): Basis of Presentation The consolidated financial statements present the consolidated assets, liabilities and operations of Realty-VII and Windsor L.P. All intercompany balances and transactions have been eliminated. In connection with its adoption of a liquidation plan during 2001, the Partnership adopted the liquidation basis of accounting which, among other specifications, requires that assets be stated at net realizable value and that a net loss during the liquidation period, if any, be accrued. Management believes there is currently no material liquidation period losses that require accrual. The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Risks and Uncertainties The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership invests its cash primarily in deposits and money market funds with commercial banks. The Partnership has not experienced any losses to date on its invested cash. Cash and Cash Equivalents The Partnership includes all short-term investments with original maturities of three months or less from the date of acquisition in cash and cash equivalents. The cash investments are recorded at cost, which approximates market values. Rental Revenue Residential leases require the advance payment of monthly base rent. Rental revenue are recorded on the accrual basis. Real Estate Assets Real estate assets and equipment are stated at depreciated cost. Pursuant to Financial Accounting Standards Board's Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," impairment losses are recorded on long-lived assets used in operations on a property by property basis, when events and circumstances indicate that the real estate assets might be impaired and the estimated undiscounted cash flows, without interest charges, to be generated by those assets are less than the carrying amount of those assets. Upon determination that an impairment has occurred, those assets shall be reduced to fair value less estimated costs to sell. Continued F-10 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued B. Significant Accounting Policies, Continued Real Estate Assets, Continued Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements which improve or extend the useful life of the assets are capitalized. Except for amounts attributed to land, rental property and improvements are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives by asset category are: Buildings and improvements 3 to 25 years Equipment, furnishings and fixtures 3 to 8 years Realized gains and losses from sale of real estate assets are recognized when the sale is consummated, the earning process is complete, and the Partnership does not have substantial continuing involvement with the property. Deferred Expenses Costs of obtaining and recording mortgages are amortized over the term of the related mortgage notes using the straight-line method which approximates the effective interest method. Income Taxes The Partnership is not liable for federal or state income taxes as the Partnership income or loss is allocated to the Partners for income tax purposes. In the event that the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and the examination results in a change in the Partnership taxable income or loss, such change will be reported to the Partners. Descriptive Information About Reportable Segments The Partnership operated and developed apartment communities which generated rental and other income through the leasing of apartment units. The General Partners separately evaluated the performance of each of the Partnership's apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single dominant apartment communities segment. All revenue are from external customers and no revenue are generated from transactions with other segments. There are no tenants who contributed 10% or more of the Partnership's total revenue during 2001, 2000 or 1999. Investment in Securities Investment in securities is carried at its original issuance valuation as the common stock is not listed or traded on an exchange and is not considered a marketable security pursuant to Statement of Financial Accounting Standards Opinion No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). Continued F-11 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued C. Cash and Cash Equivalents Cash and cash equivalents at December 31, 2001 and 2000 consisted of the following: 2001 2000 ------------- ------------- Cash and money market accounts $ 8,968,487 $ 456,851 ============= ============= D. Investment in Securities On October 5, 2000, the Partnership, as a member of an alliance of major multi-family real estate companies, executed a master lease agreement ("MLA") with a provider of high-speed internet, video and voice services to multi-family communities. Pursuant to the MLA, the Partnership granted the provider preferred lease, license and access rights to provide data services, consisting of high-speed broadband internet access and video services, to the residents at some of its multi-family communities for a ten-year period. In exchange for these rights, the Partnership received 250,843 shares of common stock, which were valued at $.2285 per share or $57,341. In addition, the Partnership will receive 7.5% of the gross revenues that the provider obtains from providing its services as well as a fixed amount for each resident that executes a subscriber agreement. In conjunction with the execution of the MLA, the Partnership made an investment of $5,751 in exchange for 25,164 additional shares of common stock also valued at $.2285 per share. The Partnership incurred approximately $2,248 in closing costs related to the acquisition by the Partnership and the closing costs incurred were recorded as an investment in securities in the financial statements as of December 31, 2000. On November 20, 2001, concurrent with the sale of the Partnership remaining multi-family apartment community, the General Partners determined that the MLA and the related common stock were worthless. The loss associated with the write-off of these assets was approximately $8,000 and is included in operating expenses on the Consolidated Statement of Operations for the year ended December 31, 2001. E. Sale of Property On August 29, 2001, the Partnership sold Courtyards Village Apartments, a 224-unit multi-family apartment community, located in Naperville, Illinois, to an unaffiliated third party. The Partnership received $7,608,399, net of closing costs of $83,648 and debt of $5,075,953 assumed by the buyer, and repaid accrued interest of $30,106. For financial reporting purposes, the Partnership realized a gain of $9,166,649 on the sale. The gain was calculated as the difference between the property's selling price less net book value of the property and closing costs. On November 20, 2001, the Partnership sold Windsor Apartments ("Windsor") to an unaffiliated third party. Windsor is a 300-unit multi-family apartment located in Garland, Texas. The Partnership received $12,235,336, less payoff of closing costs of $80,518 and payment of the mortgage note payable and accrued interest of $4,971,598. A gain of $8,613,678 was realized on the sale for financial reporting purposes, which was calculated as the difference between the property's selling price less net book value of the property and closing costs. Continued F-12 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued F. Mortgage Notes Payable The properties that were owned by the Partnership were pledged as collateral for the respective non-recourse mortgage notes payable outstanding at December 31, 2000. Mortgage notes payable consisted of the following: Principal Annual -------------------------- Interest Maturity Property 2001 2000 Rate Date --------------- ----------- ----------- ------------ ------------ Courtyards Village Apartments $ - $ 5,109,846 7.88% August 1, 2007 Windsor Apartments $ - 4,997,600 9.25% May 1, 2001 ----------- ----------- Total $ - $10,107,446 =========== =========== Courtyards Village Concurrent with the sale of Courtyards Village, the mortgage note was assumed by the buyer on August 29, 2001. On July 30, 1997, the Partnership refinanced the Courtyards Village mortgage note. The property was refinanced with a $5,280,000 non-recourse mortgage note payable at the rate of 7.88% per annum with monthly principal and interest payments of $38,302. The mortgage note, which was collateralized by the property, was scheduled to mature on August 1, 2007 at which time the remaining principal (approximately $4,658,637) and any accrued interest would have been due. The note could be prepaid, subject to a prepayment premium, at any time with 30 days notice. The Partnership used the majority of the proceeds from the refinancing to repay the existing mortgage note on the property of $3,172,809, pay closing costs of $136,040 and to establish various escrows. As part of the refinancing, the Partnership was required to establish a $9,525 repair escrow and a replacement reserve escrow. The replacement reserve escrow required no initial deposit at the close and monthly deposits of $4,200 which began on September 1, 1998. Windsor Apartments Concurrent with the sale of Windsor Apartments, the mortgage note payable was repaid in full on November 20, 2001. On April 27, 2001, the General Partners signed an agreement extending the mortgage note payable on Windsor Apartments, under original terms, until May 1, 2002. The Partnership paid an extension fee of $24,962 for this privilege. The property was subject to a non-recourse mortgage note payable in the original amount of $5,300,000, based on a 30-year amortization and payable at the rate of 9.25% per annum in equal monthly installments of $43,602, consisting of principal and interest. At maturity, all unpaid principal, approximately $5,021,000, and any accrued interest would have been due. The Partnership paid interest on its borrowings in the amounts of $701,965, $870,240, and $879,470 during the years ended December 31, 2001, 2000 and 1999, respectively. Continued F-13 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued G. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following at December 31, 2001 and 2000: 2001 2000 ------------- ------------- Accounts payable $ 2,973 $ 8,338 Accrued real estate taxes - 419,230 Other liabilities 100,369 203,556 Tenant security deposits - 57,461 Prepaid rent - 28,952 ------------- ------------- $ 103,342 $ 717,537 ============= ============= H. Partners' Equity Under the terms of the Partnership Agreement, losses from operations are allocated 99% to the Investor Limited Partners and 1% to the General Partners. Profits from operations are allocated 90% to the Investor Limited Partners, 8% to the Original Limited Partner and 2% to the General Partners, until such time that the Investor Limited Partners have received a return of their total invested capital plus a 9% per annum cumulative return thereon and thereafter, 69% to the Investor Limited Partners, 25% to the Original Limited Partner and 6% to the General Partners. Under the terms of the Partnership Agreement, cash distributions are made on the same basis as the allocations of profits described above. Pursuant to the Partnership Agreement, proceeds from Capital Transactions shall first be applied to the payment of all debts and liabilities of the Partnership and second to fund reserves for contingent liabilities. The remaining net cash proceeds will then be allocated and distributed 99% to the Investor Limited Partners until they have received a return of their total invested capital plus a 9% per annum cummulative return and 1% to the General Partners, thereafter net cash proceeds will be distributed in accordance with the Partnership Agreement. The Partnership entered into a Sales Agent Agreement for the public offering of Units. Under that Agreement, the Partnership was required to pay to the sales agent underwriting commissions and related financial consulting fees equal to 9% of the gross proceeds from the offering. In addition, the sales agent will be entitled to receive, over the life of the Partnership, a subordinated financial consulting fee based upon the net cash proceeds received by the Partnership as a result of sales and refinancings of Partnership properties, which fee shall be in an amount not exceeding 1.5% of the gross proceeds of the offering of Units. No such fees will, however, be payable unless and until all Partners have received a return of their Invested Capital and the Investor Limited Partners have received a 9% per annum cumulative return. The Partnership does not expect to incur any subordinated financial consulting fees. Continued F-14 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued H. Partners' Equity, Continued As of December 31, 2001, the following cumulative partner contributions and allocations have been made since the inception of the Partnership: Total Investor Original Partners' Limited Limited General Equity/ Partners Partner Partners (Deficit) ----------- ----------- ------------ ------------ Capital contributions $27,184,000 $ 4,000 $ 136,891 $ 27,324,891 Syndication costs (3,697,375) - (135,891) (3,833,266) Distributions: Operation (6,962,887) (618,922) (154,730) (7,736,539) Capital transaction (8,289,769) - (83,460) (8,373,229) Income (loss): Operations (16,836,322) 614,922 150,298 (16,071,102) Capital transaction 17,455,310 - 176,316 17,631,626 ----------- ----------- ------------ ------------ Balance at December 31, 2001 $ 8,852,957 $ - $ 89,424 $ 8,942,381 =========== =========== ============ ============ I. Related Party Transactions The Partnership pays property management fees to an affiliate of the General Partners for management services. Pursuant to the management agreements, management fees are payable monthly at a rate of 5% of gross receipts from residential properties under management. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties including administrative expenses. Amounts accrued or paid to the General Partners' affiliates during the years ended December 31, 2001, 2000 and 1999 were as follows: 2001 2000 1999 ------------ ------------ ------------ Property management fees $ 166,052 $ 185,038 $ 157,467 Expense reimbursements 313,823 203,128 196,973 ------------ ------------ ------------ Charged to operations $ 479,875 $ 388,166 $ 354,440 ============ ============ ============ Expense reimbursements due from affiliates of $28,737 and $31,115 were included in due from affiliates at December 31, 2001 and 2000, respectively. Continued F-15 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Liquidation), Continued J. Federal Income Taxes For federal income tax purposes, the Partnership is depreciating property using the Accelerated Cost Recovery System ("ACRS") and the Modified Accelerated Cost Recovery System ("MACRS") depending on which is applicable. The reconciliation of the net income (loss) reported in the accompanying Consolidated Statement of Operations with the net income (loss) reported in the Partnership's federal income tax return for the years ended December 31, 2001, 2000 and 1999 is as follows: 2001 2000 1999 ------------ ------------ ------------ Net income (loss) per Consolidated Statement of Operations $ 17,342,367 $ (279,488) $ (549,227) Difference in book and tax depreciation and amortization 616,820 432,720 215,924 Difference between book and tax gain on sale of property 1,752,185 - - Bonus and Severance Pay (44,230) - - Rental adjustment required by generally accepted accounting principles (4,697) (4,246) (399) ------------ ------------ ------------ Net income (loss) for federal income tax purposes $ 19,662,445 $ 148,986 $ (333,702) ============ ============ ============ The allocation of the net income for federal income tax purposes for the year ended December 31, 2001 is as follows: Portfolio Passive Income Income Total ------------ ------------ ------------ Investor Limited Partners $ 52,550 $ 18,459,523 $ 18,512,073 Original Limited Partner 4,670 598,349 603,019 General Partners 1,167 546,186 547,353 ------------ ------------ ------------ $ 58,387 $ 19,604,058 $ 19,662,445 ============ ============ ============ For the years ended December 31, 2001, 2000 and 1999, the per Unit net income (loss) to the Investor Limited Partners for federal income tax purposes was $681.00, $4.93 and $(12.15), respectively. The basis of the Partnership's assets for financial reporting purposes exceeds its tax basis by approximately $97,000 and $1,193,000 at December 31, 2001 and 2000, respectively. The basis of the Partnership's liabilities for financial reporting purposes exceeds its tax basis by approximately $22,000 at December 31, 2001 and is less than its tax basis by approximately $3,483,000 at December 31, 2000. F-16 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 ---------- Reconciliation of Real Estate and Accumulated Depreciation for each of the three years in the period ended December 31, 2001: 2001 2000 1999 ------------ ------------ ------------ Real Estate Balance at beginning of year $ 23,437,547 $ 23,075,371 $ 22,262,484 Acquisition and improvements 371,451 362,176 812,887 Sale of property (23,808,998) - - ------------ ------------ ------------ Balance at end of year $ - $ 23,437,547 $ 23,075,371 ============ ============ ============ 2001 2000 1999 ------------ ------------ ------------ Accumulated Depreciation Balance at beginning of year $ 15,671,250 $ 14,265,488 $ 12,751,953 Depreciation expense 998,388 1,405,762 1,513,535 Sale of property (16,669,638) - - ------------ ------------ ------------ Balance at end of year $ - $ 15,671,250 $ 14,265,488 ============ ============ ============ The aggregate cost of the Partnership's real estate for federal income tax purposes is $0 and the aggregate accumulated depreciation for federal income tax purposes is $0. F-17