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 THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 The total number of pages in this document is 10. 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, 1997 1996 Real estate assets: Multi-family apartment complexes, net of accumulated depreciation of $10,880,907, and $10,420,771, respectively $ 8,510,178 $ 8,770,063 Retail center, net of accumulated depreciation of $3,872,181, and $3,676,352, respectively 5,843,228 6,038,521 Total real estate assets 14,353,406 14,808,584 Cash and cash equivalents (Note 2) 1,049,681 1,177,332 Cash restricted for tenant security deposits 31,755 36,823 Replacement reserve escrow 60,132 52,009 Prepaid expenses and other assets 701,457 584,929 Deferred expenses, net of accumulated amortization of $109,310 and $91,377, respectively 177,984 195,917 Total assets $16,374,415 $16,855,594 LIABILITIES AND PARTNERS' EQUITY Liabilities: Mortgage notes payable $12,465,507 $12,562,165 Accounts payable 3,324 7,431 Accrued expenses and other liabilities 765,818 846,419 Total liabilities 13,234,649 13,416,015 Partners' equity (deficit) (Note 3): Investor Limited Partners (27,184 Units outstanding) 3,802,831 4,072,663 Original Limited Partner (408,933) (384,948) General Partners (254,132) (248,136) Total Partners' equity 3,139,766 3,439,579 Total liabilities and Partners' equity $16,374,415 $16,855,594 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, 1997 1996 1997 1996 Revenue: Rental $1,165,732 $1,122,274 $2,361,772$2,287,161 Interest income 12,745 19,332 28,058 39,569 Total revenue 1,178,477 1,141,606 2,389,830 2,326,730 Expenses: Operating (Note 4) 284,927 285,765 566,898 570,204 Maintenance 121,511 81,774 187,606 152,000 Real estate taxes 106,990 112,593 234,811 222,556 General and administrative (Note 4)36,236 7,770 73,959 36,702 Management fees (Note 4) 54,348 48,698 104,436 97,957 Depreciation and amortization 337,327 321,647 673,898 637,439 Interest 272,511 276,396 545,991 553,688 Total expenses 1,213,850 1,134,643 2,387,599 2,270,546 Net income (loss) $ (35,373) $ 6,963 $ 2,231$ 56,184 Allocation of net income (loss) (Note 3): Investor Limited Partners (27,184 Units outstanding) $ (35,019) $ 6,267 $ 2,008$ 50,566 Per Unit of Investor Limited Partner Interest $ (1.29) $ .23 $ .07$ 1.86 Original Limited Partner $ - $ 557 $ 178$ 4,495 General Partners $ (354) $ 139 $ 45$ 1,123 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, 1997 1996 Operating activities: Net income $ 2,231 $ 56,184 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 673,898 637,439 Changes in assets and liabilities: Decrease (increase) in cash restricted for tenant security deposits 5,068 (1,421) Decrease (increase) in prepaid expenses and other assets (116,528) 39,350 Decrease in accounts payable (3,440) (48,530) Decrease in accrued expenses and other liabilities (80,601) (27,598) Net cash provided by operating activities 480,628 655,424 Investing activities: Deposits to replacement reserve escrow (12,000) (12,000) Withdrawals from replacement reserve escrow 3,877 17,287 Additions to fixed assets (200,787) (151,649) Decrease in accounts payable related to fixed asset additions (667) - Net cash used in investing activities (209,577) (146,362) Financing activities: Principal payments on mortgage notes payable (96,658) (89,182) Distributions (302,044) (302,044) Net cash used in financing activities (398,702) (391,226) Net increase (decrease) in cash and cash equivalents (127,651) 117,836 Cash and cash equivalents, beginning of period 1,177,332 1,311,037 Cash and cash equivalents, end of period $1,049,681 $1,428,873 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, 1996 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, 1997, its results of operations for the three and six months ended June 30, 1997 and 1996, and its cash flows for the six months ended June 30, 1997 and 1996. 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, 1997 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)Cash and Cash Equivalents Cash and cash equivalents consisted of the following: June 30,December 31, 1997 1996 Cash and money market accounts $ 553,276 $ 285,964 Commercial paper 496,405 891,368 $1,049,681 $ 1,177,332 At June 30, 1997, commercial paper represents corporate issues complying with Section 6.2(a) of the Partnership Agreement purchased through a corporate issuer maturing in the third quarter of 1997. At June 30, 1997, the carrying value of the Partnership's investment in commercial paper approximates fair value. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) Changes in Partners' Equity A summary of changes in Partners' equity (deficit) for the six months ended June 30, 1997 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Equity Balance at December 31, 1996$ 4,072,663$(384,948)$(248,136)$3,439,579 Net income 2,008 178 45 2,231 Distributions (271,840) (24,163) (6,041) (302,044) Balance at June 30, 1997 $ 3,802,831$(408,933)$(254,132)$3,139,766 (4)Related Party Transactions Commencing with the date of acquisition of the Partnership's properties, the Partnership entered into agreements under which property management fees are paid to an affiliate of the General Partners for services as management agent. Such agreements provide for management fees payable monthly at a rate of 4% of the gross receipts, net of leasing commissions, from the commercial property under management and 5% of gross receipts from residential properties under management. The residential management agreements were sold to BRI OP Limited Partnership, a subsidiary of Berkshire Realty Company Inc., a publicly traded real estate investment trust and an affiliate of the General Partners, on February 28, 1997. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties including accounting, computer, insurance, travel, legal and payroll; and with the preparation and mailing of reports and other communications to the Limited Partners. Amounts accrued or paid to the General Partners or their affiliates were as follows: For the Three Months For the Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Property management fees$ 54,348 $ 48,698 $104,436 $ 97,957 Expense reimbursements 41,454 34,690 79,015 70,789 Charged to operations$ 95,802 $ 83,388 $183,451 $ 168,746 (5) Subsequent Event Subsequent to the end of the second quarter, on July 30, 1997, the Partnership refinanced the Courtyards Village mortgage note. The new $5,280,000 note bears interest at an annual rate of 7.88% with equal monthly installments of $38,302, consisting of principal and interest, and matures on June 1, 2007. Net refinancing proceeds are expected to total approximately $1,860,000. 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 improvements, debt service and other 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. Subsequent to the end of the second quarter, on July 30, 1997, the Partnership refinanced the Courtyards Village mortgage note. The new $5,280,000 note bears interest at an annual rate of 7.88% with equal monthly installments of $38,302, consisting of principal and interest, and matures on June 1, 2007. Refinancing proceeds of approximately $1,860,000 from the refinancing will provide additional liquidity to fund capital improvements at the Partnership's properties, Courtyards Village, Nora Corners and Windsor Apartments. Approximately $1,217,000 in fixed asset expenditures are anticipated in 1997 in order to improve the appearance of the properties and allow them to remain competitive in their respective markets. These improvements include sign replacements at Windsor Apartments and interior improvements and appliance replacements at both Courtyards Village and Windsor Apartments. Improvements at Nora Corners primarily consist of tenant build-outs and upgrades to the exterior of the building. 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, 1997. The General Partners provide the information below to meet requirements of the Partnership Agreement. 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 $ (3,000) Items not requiring or (requiring) the use of operating funds: Tax basis depreciation and amortization 682,000 Principal payments on mortgage notes payable (97,000) Expenditures for capital improvements (201,000) Additions to working capital reserves (79,000) Cash Flow $ 302,000 Continued< KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES Operations Cash Flow, as calculated by Section 8.2 (a) of the Partnership Agreement, before additions to capital reserves, decreased during the six months ended June 30, 1997 as compared to the same period in 1996 due primarily to increased capital improvements at the Partnership's two residential properties, Courtyards Village ("Courtyards") and Windsor Apartments ("Windsor") and to a decrease in net income. Overall, net income decreased for the three and six months ended June 30, 1997 when compared to the same periods in 1996 as the increase in total expenses more than offset the increase in total revenue. While occupancy remained relatively stable during these periods, rental revenue increased as a result of collections of late and relet fees at Courtyards during the second quarter of 1997 and rental rate increases implemented at Courtyards and Windsor in 1996 and 1997. Total expenses increased for the three and six months ended June 30, 1997 as compared to the same periods in 1996 as maintenance, general and administrative, and depreciation expenses all rose. Maintenance expense increased primarily due to preventative pest control at Windsor and landscaping at Courtyards during the second quarter of 1997. General and administrative expense increased due to costs incurred in connection with the operation of the Partnership, including the preparation of reports and other communications to investors. Also, the Partnership incurred legal costs related to the unsolicited tender offers made to purchase Partnership Units. Depreciation expense increased in conjunction with increased capital improvements completed at the Partnership's properties in recent years. 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/Wayne H. Zarozny Wayne H. Zarozny Treasurer and Chief Accounting Officer of the Krupp Corporation, a General Partner. DATE: August 12, 1997