UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEx SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-14377 Krupp Realty Limited Partnership-VII Massachusetts 04-2842924 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) ( Z i p Code) (617) 423-2233 (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 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS This Form 10-Q 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. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS June 30, December 31, 1996 1995 Multi-family apartment complexes, net of accumulated depreciation of $9,947,500, and $9,521,601, respectively $ 8,750,719 $ 9,030,289 Retail center, net of accumulated depreciation of $3,479,230, and $3,285,620, respectively 6,187,935 6,376,225 Total real estate assets 14,938,654 15,406,514 Cash and cash equivalents 1,428,873 1,311,037 Cash restricted for tenant security deposits 37,400 35,979 Cash restricted for capital improvements 52,175 57,462 Prepaid expenses and other assets 529,425 568,775 Deferred expenses, net of accumulated amortization of $73,444 and $55,514, respectively 213,850 231,780 Total assets $17,200,377 $17,611,547 LIABILITIES AND PARTNERS' EQUITY Mortgage notes payable $12,655,009 $12,744,191 Accounts payable - 48,530 Accrued expenses and other liabilities 758,074 785,672 Total liabilities 13,413,083 13,578,393 Partners' equity (Note 2): Investor Limited Partners (27,184 Units outstanding) 4,385,606 4,606,880 Original Limited Partner (357,130) (337,462) General Partners (241,182) (236,264) Total Partners' equity 3,787,294 4,033,154 Total liabilities and Partners' equity $17,200,377 $17,611,547 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months For the Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Revenue: Rental $1,122,274 $1,112,379 $2,287,161 $2,211,953 Interest income 19,332 16,292 39,569 29,839 Total revenue 1,141,606 1,128,671 2,326,730 2,241,792 Expenses: Operating (Note 3) 285,765 236,881 570,204 479,797 Maintenance 81,774 70,818 152,000 131,252 Real estate taxes 112,593 108,741 222,556 222,312 Management fees (Note 3) 48,698 48,570 97,957 96,005 Depreciation and amortization 321,647 316,572 637,439 630,233 Interest 276,396 279,980 553,688 560,787 General and administrative (Note 3) 7,770 33,121 36,702 49,577 Total expenses 1,134,643 1,094,683 2,270,546 2,169,963 Net income $ 6,963 $ 33,988 $ 56,184 $ 71,829 Allocation of net income (Note 2): Investor Limited Partners (27,184 Units outstanding) $ 6,267 $ 30,589 $ 50,566 $ 64,646 Per Unit of Investor Limited Partner Interest $ .23 $ 1.13 $ 1.86 $ 2.38 Original Limited Partner $ 557 $ 2,719 $ 4,495 $ 5,746 General Partners $ 139 $ 680 $ 1,123 $ 1,437 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1996 1995 Operating activities: Net income $ 56,184 $ 71,829 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 637,439 630,233 Decrease (increase) in cash restricted for tenant security deposits (1,421) 14,436 Decrease in prepaid expenses and other assets 39,350 93,909 Decrease in accounts payable (48,530) (24,906) Decrease in accrued expenses and other liabilities (27,598) (69,151) Net cash provided by operating activities 655,424 716,350 Investing activities: Additions to fixed assets (151,649) (78,740) Decrease in cash restricted for capital improvements 5,287 570 Net cash used in investing activities (146,362) (78,170) Financing activities: Increase in deferred expenses - (6,613) Principal payments on mortgage notes payable (89,182) (82,294) Distributions (302,044) (302,044) Net cash used in financing activities (391,226) (390,951) Net increase in cash and cash equivalents 117,836 247,229 Cash and cash equivalents, beginning of period 1,311,037 1,021,464 Cash and cash equivalents, end of period $1,428,873 $1,268,693 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of the General Partners of Krupp Realty Limited Partnership-VII and Subsidiaries (the "Partnership"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to the Consolidated Financial Statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners of the Partnership, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Partnership's consolidated financial position as of June 30, 1996, its results of operations for the three and six months ended June 30, 1996 and 1995, and its cash flows for the six months ended June 30, 1996 and 1995. Certain prior period balances have been reclassified to conform with current period consolidated financial statement presentation. The results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. 2. Changes in Partners' Equity A summary of changes in Partners' equity (deficit) for the six months ended June 30, 1996 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Equity Balance at December 31, 1995 $4,606,880 $(337,462) $(236,264) $4,033,154 Distributions (271,840) (24,163) (6,041) (302,044) Net income 50,566 4,495 1,123 56,184 Balance at June 30, 1996 $4,385,606 $(357,130) $(241,182) $3,787,294 3. Related Party Transactions Commencing with the date of acquisition of the Partnership's properties, the Partnership entered into agreements under which property management fees are paid to an affiliate of the General Partners for services as management agent. Such agreements provide for management fees payable monthly at a rate of 4% of the gross receipts, net of leasing commissions, from the commercial properties under management and 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 accounting, computer, insurance, travel, legal and payroll; and with the preparation and mailing of reports and other communications to the Limited Partners. Amounts accrued or paid to the General Partners or their affiliates are as follows: For the Three Months For the Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Property management fees $48,698 $ 48,570 $ 97,957 $ 96,005 Expense reimbursements 34,690 30,593 70,789 63,400 Charged to operations $83,388 $ 79,163 $168,746 $159,405 In addition to the amounts above, refinancing and disposition costs of $0 and $3,793 were paid to the General Partners or their affiliates at June 30, 1996 and December 31, 1995, respectively. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES Item 2. 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 The Partnership's ability to generate cash adequate to meet its needs is dependent primarily upon the successful operations of its real estate investments. Such ability would also be impacted by the future availability of bank borrowings and the future refinancing and sale of the Partnership's remaining real estate investments. These sources of liquidity will be used by the Partnership for payment of expenses related to real estate operations, capital expenditures, debt service and expenses. Cash Flow, if any, as calculated under Section 8.2(a) of the Partnership Agreement, will then be available for distribution to the Partners. In 1994, the General Partners determined that there was sufficient cash flow to reinstate semi-annual distributions. These distributions commenced in August 1994 at a rate of $5.00 per Unit and increased in February 1995 to an annual rate of $20.00 per Unit. The Partnership's properties (Courtyards Village, Nora Corners and Windsor Apartments) have generated increased revenue due to increased occupancy and higher rental rates in 1996, as compared to 1995. Furthermore, the Partnership has increased availability of funds due to reduced mortgage payments resulting from the 1994 refinancings of mortgage notes payable at Nora Corners and Windsor Apartments. In 1996, Courtyards Village, Nora Corners and Windsor Apartments have scheduled capital improvement expenditures totaling $312,000, $103,000 and $336,000, respectively. The General Partners believe these improvements will improve the appearance of the properties and allow them to remain competitive in their respective real estate markets. Cash Flow Shown below, as required by the Partnership Agreement, is the calculation of Cash Flow of the Partnership for the six months ended June 30, 1996. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Cash Flow should not be considered by the reader as a substitute to net income (loss), as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Rounded to $1,000 Net income for tax purposes $ 24,000 Items not requiring or (requiring) the use of operating funds: Tax basis depreciation and amortization 673,000 Principal payments on mortgage notes payable (89,000) Expenditures for capital improvements (152,000) Additions to working capital reserves (154,000) Cash Flow $ 302,000 Operations Cash Flow for the six months ended June 30, 1996, before additions to working capital reserves, decreased as compared to the same period in 1995 due primarily to increased capital improvements at Windsor Apartments for exterior painting in the second quarter of 1996. Net income decreased for the three and six months ended June 30, 1996 as compared to the same period in 1995, as the increase in total expenses more than offset the increase in revenue. Strong market conditions resulted in an increase in rental rates at Courtyards Village and Windsor Apartments in 1996. Total expenses increased 4% for the three and six months ended June 30, 1996 as compared to the same period in 1995. This increase is attributable to a rise in operating and maintenance expenses between the two periods. Although utility rates have remained the same in 1996, severe weather in the Chicago area, especially in the first quarter of 1996, has resulted in higher utility consumption at Courtyards Village. This, coupled with prior year's insurance refunds received in 1995, has increased operating expense when comparing the three and six months ended June 30, 1996 to the same period in 1995. Maintenance expense increased due to exterior painting and carpentry along with increased landscaping at Courtyards Village and Windsor Apartments. These repairs have enhanced the appearance of the properties and will help them remain competitive in their respective markets. General In accordance with Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which is effective for fiscal years beginning after December 15, 1995, the Partnership has implemented policies and practices for assessing impairment of its real estate assets. The investments in properties are carried at cost less accumulated depreciation unless the General Partners believe there is a significant impairment in value, in which case a provision to write down investments in properties to fair value will be charged against income. At this time, the General Partners do not believe that any assets of the Partnership are significantly impaired. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None SIGNATURE 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. Krupp Realty Limited Partnership-VII (Registrant) BY: /s/Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of the Krupp Corporation, a General Partner. DATE: July , 1996