UNITED STATES 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, 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) (Zip 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. CONSOLIDATED 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 September 30, December 31, 1996 1995 Multi-family apartment complexes, net of accumulated depreciation of $10,182,384, and $9,521,601, respectively $ 8,828,868 $ 9,030,289 Retail center, net of accumulated depreciation of $3,578,549, and $3,285,620, respectively 6,129,236 6,376,225 Total real estate assets 14,958,104 15,406,514 Cash and cash equivalents 1,052,362 1,311,037 Cash restricted for tenant security deposits 37,611 35,979 Cash restricted for capital improvements 52,364 57,462 Prepaid expenses and other assets 548,354 568,775 Deferred expenses, net of accumulated amortization of $82,411 and $55,514, respectively 204,883 231,780 Total assets $16,853,678 $17,611,547 LIABILITIES AND PARTNERS' EQUITY Mortgage notes payable $12,609,054 $12,744,191 Accounts payable 1,566 48,530 Accrued expenses and other liabilities 807,598 785,672 Total liabilities 13,418,218 13,578,393 Partners' equity (deficit) (Note 2): Investor Limited Partners (27,184 Units outstanding) 4,064,108 4,602,033 Original Limited Partner (380,968) (333,153) General Partners (247,680) (235,726) Total Partners' equity 3,435,460 4,033,154 Total liabilities and Partners' equity $16,853,678 $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 Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Revenue: Rental $1,148,701 $1,132,319 $3,435,862 $3,344,272 Interest income 17,290 18,274 56,859 48,113 Total revenue 1,165,991 1,150,593 3,492,721 3,392,385 Expenses: Operating (Note 3) 300,572 290,888 870,776 770,685 Maintenance 101,056 125,375 253,056 256,627 Real estate taxes 130,056 106,905 352,612 329,217 General and administrative (Note 3) 19,920 50,636 56,622 100,213 Management fees (Note 3) 45,526 50,855 143,483 146,860 Depreciation and amortization 343,170 321,868 980,609 952,101 Interest 275,480 279,137 829,168 839,924 Total expenses 1,215,780 1,225,664 3,486,326 3,395,627 Net income (loss) $ (49,789) $ (75,071) $ 6,395 $ (3,242) Allocation of net income(loss) (Note 2): Investor Limited Partners (27,184 Units outstanding) $ (49,291) $ (74,320) $ 5,755 $ (3,210) Per Unit of Investor Limited Partner Interest $ (1.81) $ (2.73) $ .21 $ (.12) Original Limited Partner $ - $ - $ 512 $ - General Partners $ (498) $ (751) $ 128 $ (32) 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 Nine Months Ended September 30, 1996 1995 Operating activities: Net income (loss) $ 6,395 $ (3,242) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 980,609 952,101 Decrease (increase) in cash restricted for tenant security deposits (1,632) 20,236 Decrease in prepaid expenses and other assets 20,421 2,292 Decrease in accounts payable (46,964) (15,305) Increase (decrease) in accrued expenses and other liabilities 21,926 (41,250) Net cash provided by operating activities 980,755 914,832 Investing activities: Additions to fixed assets (505,302) (154,356) Decrease (increase) in cash restricted for capital improvements 5,098 (5,430) Net cash used in investing activities (500,204) (159,786) Financing activities: Increase in deferred expenses - (6,613) Principal payments on mortgage notes payable (135,137) (124,697) Distributions (604,089) (604,088) Net cash used in financing activities (739,226) (735,398) Net increase (decrease) in cash and cash equivalents (258,675) 19,648 Cash and cash equivalents, beginning of period 1,311,037 1,021,464 Cash and cash equivalents, end of period $1,052,362 $1,041,112 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 September 30, 1996, its results of operations for the three and nine months ended September 30, 1996 and 1995, and its cash flows for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 1996 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Equity Balance at December 31, 1995 $4,602,033 $(333,153) $(235,726) $4,033,154 Distributions (543,680) (48,327) (12,082) (604,089) Net income 5,755 512 128 6,395 Balance at September 30, 1996 $4,064,108 $(380,968) $(247,680) $3,435,460 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 Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Property management fees $45,526 $ 50,855 $143,483 $146,860 Expense reimbursements 36,521 40,332 107,310 103,732 Charged to operations $82,047 $ 91,187 $250,793 $250,592 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 September 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. In 1996, Courtyards Village, Nora Corners and Windsor Apartments anticipate capital improvement expenditures totaling approximately $281,000, $111,000 and $337,000, 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 nine months ended September 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 loss for tax purposes $ (21,000) Items not requiring or (requiring) the use of operating funds: Tax basis depreciation and amortization 1,010,000 Principal payments on mortgage notes payable (135,000) Expenditures for capital improvements (505,000) Releases from working capital reserves 255,000 Cash Flow $ 604,000 Operations Cash Flow for the nine months ended September 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 and Courtyards Village for exterior painting in 1996. Overall, net income (loss) improved for the three and nine months ended September 30, 1996 as compared to the same periods in 1995. Total revenue increased while total expenses remained relatively stable during the quarter ended September 30, 1996 as compared to the same period in 1995. During the nine month period ended September 30, 1996, the increase in revenue more than offset the increase in total expenses when compared to the same period in 1995. The increases in revenue are due to increased rental rates at Courtyards Village and Windsor Apartments as these properties continue to enjoy strong market conditions and steady occupancy in 1996. Although total expenses remained relatively stable for the third quarter of 1996 as compared to the same period in 1995, maintenance and real estate tax expenses decreased and increased, respectively. Maintenance expense decreased as landscaping, parking lot and exterior building improvements were implemented at Courtyards Village and Windsor Apartments in the third quarter of 1995. These improvements enhanced the appearance of the properties and will help them remain competitive in their respective markets. Real estate taxes increased as a result of a reassessment of Windsor Apartments in 1996 by the local taxing authority. During the first nine months of 1996, total expenses increased when compared to the first nine months of 1995. This increase is attributable to a rise in both operating and real estate tax expenses. Operating expense increased as utility consumption increased due to severe weather conditions in the Chicago area during the first quarter of 1996. Additionally, operating expense increased as a result of prior years' insurance refunds received in the second quarter of 1995. Real estate taxes increased for the same reason as discussed above. 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: November 5, 1996