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 September 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 11. 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, 1997 1996 Real estate assets: Multi-family apartment complexes, net of accumulated depreciation of $11,142,891 and $10,420,771, respectively $ 8,655,516 $ 8,770,063 Retail center, net of accumulated depreciation of $3,970,537, and $3,676,352, respectively 5,748,589 6,038,521 Total real estate assets 14,404,105 14,808,584 Cash and cash equivalents (Note 2) 2,707,271 1,177,332 Cash restricted for tenant security deposits 28,857 36,823 Replacement reserve escrow - 52,009 Prepaid expenses and other assets 588,951 584,929 Deferred expenses, net of accumulated amortization of $120,533 and $91,377, respectively (Notes 3 and 5) 301,992 195,917 Total assets $18,031,176 $16,855,594 LIABILITIES AND PARTNERS' EQUITY Liabilities: Mortgage notes payable (Note 3) $14,539,741 $12,562,165 Accrued expenses and other liabilities 713,939 853,850 Total liabilities 15,253,680 13,416,015 Partners' equity (deficit) (Note 4): Investor Limited Partners (27,184 Units outstanding) 3,471,569 4,072,663 Original Limited Partner (433,275) (384,948) General Partners (260,798) (248,136) Total Partners' equity 2,777,496 3,439,579 Total liabilities and Partners' equity $18,031,176 $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 Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenue: Rental $1,156,264 $1,148,701 $3,518,036 $3,435,862 Interest income 23,301 17,290 51,359 56,859 Total revenue 1,179,565 1,165,991 3,569,395 3,492,721 Expenses: Operating (Note 5)290,816 300,572 857,714 870,776 Maintenance 81,969 101,056 269,575 253,056 Real estate taxes 111,620 130,056 346,431 352,612 General and administrative (Note 5) 30,767 19,920 104,726 56,622 Management fees (Note 5) 49,536 45,526 153,972 143,483 Depreciation and amortization 371,563 343,170 1,045,461 980,609 Interest 303,519 275,480 849,510 829,168 Total expenses 1,239,790 1,215,780 3,627,389 3,486,326 Net income (loss)$ (60,225)$ (49,789) $ (57,994)$ 6,395 Allocation of net income (loss) (Note 4): Investor Limited Partners (27,184 Units outstanding) $ (59,623)$ (49,291)$ (57,414)$ 5,755 Investor Limited Partners Per Unit $ (2.19)$ (1.81)$ (2.11)$ .21 Original Limited Partner$ - $ - $ - $ 512 General Partners $ (602) $ (498)$ (580)$ 128 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, 1997 1996 Operating activities: Net income (loss) $ (57,994)$ 6,395 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,045,461 980,609 Changes in assets and liabilities: Decrease (increase) in cash restricted for tenant security deposits 7,966 (1,632) Decrease (increase) in prepaid expenses and other assets (4,022) 20,421 Decrease in accrued expenses and other liabilities (136,596) (25,038) Net cash provided by operating activities 854,815 980,755 Investing activities: Deposits to replacement reserve escrow (12,000) (18,000) Withdrawals from replacement reserve escrow 64,009 23,098 Additions to fixed assets (611,826) (505,302) Decrease in accrued expenses and other liabilities related to fixed asset additions (3,315) - Net cash used in investing activities (563,132) (500,204) Financing activities: Increase in deferred expenses (135,231) - Proceeds from mortgage note payable 5,280,000 - Repayment of mortgage note payable (3,172,809) - Principal payments on mortgage notes payable (129,615) (135,137) Distributions (604,089) (604,089) Net cash provided by (used in) financing activities 1,238,256 (739,226) Net increase (decrease) in cash and cash equivalents 1,529,939 (258,675) Cash and cash equivalents, beginning of period 1,177,332 1,311,037 Cash and cash equivalents, end of period $ 2,707,271$1,052,362 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 necessary to present fairly the Partnership's consolidated financial position as of September 30, 1997, its results of operations for the three and nine months ended September 30, 1997 and 1996, and its cash flows for the nine months ended September 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 nine months ended September 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: September 30, December 31, 1997 1996 Cash and money market accounts $2,309,861 $ 285,964 Commercial paper 397,410 891,368 $2,707,271 $ 1,177,332 At September 30, 1997, commercial paper represents corporate issues maturing in the fourth quarter of 1997. At September 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 - Continued (3)Mortgage Notes Payable On July 30, 1997, the Partnership completed the refinancing of the Courtyards Village Apartments 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 is collateralized by the property, matures on August 1, 2007 at which time the remaining principal (approximately $4,658,637) and any accrued interest are due. The note may be prepaid, subject to a prepayment penalty, 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 $102,485 and to establish various escrows. (4) Changes in Partners' Equity A summary of changes in Partners' equity (deficit) for the nine months ended September 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 loss (57,414) - (580) (57,994) Distributions (543,680) (48,327) (12,082) (604,089) Balance at September 30, 1997$3,471,569 $(433,275)$(260,798)$2,777,496 (5) 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 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 administrative expenses. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (5) Related Party Transactions - Continued Amounts accrued or paid to the General Partners' affiliates were as follows: For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Property management fees$49,536 $ 45,526 $153,972 $ 143,483 Expense reimbursements 41,787 36,521 120,802 107,310 Charged to operations $91,323$ 82,047 $274,774 $ 250,793 Expense reimbursements due from affiliates of $72,835 and $14,328 were included in prepaid expenses and other assets at September 30, 1997 and December 31, 1996, respectively. In addition to the amounts above, refinancing costs of $52,800 and $0 were paid to the General Partners' affiliates at September 30, 1997 and December 31, 1996, 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 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. On July 30, 1997, the Partnership successfully completed the refinancing of Courtyards Village mortgage note payable. The new $5,280,000 note bears interest at an annual rate of 7.88%, requires equal monthly principal and interest installments of $38,302, and matures on August 1, 2007. Refinancing proceeds of approximately $1,860,000 will provide additional liquidity to fund capital improvements at the Partnership's properties, Courtyards Village, Nora Corners and Windsor Apartments. In order to remain competitive in their respective markets, the Partnership's properties have spent approximately $612,000 to date and are anticipated to spend approximately $1,206,000 for fixed assets in 1997. 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. Operations Overall, net income decreased for the three and nine months ended September 30, 1997 as compared to the same periods in 1996, as the increase in total expenses more than offset the increase in total revenue. Rental revenue increased as a result of rental rate increases implemented at Courtyards Village and Windsor Apartments in 1996 and 1997 as well as late and relet fees collected in 1997 at Courtyards Village. Additionally, average occupancy at Windsor Apartments rose from 95% for the nine months ended September 30, 1996 to 97% for the nine months ended September 30, 1997. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES Operations - Continued Total expenses for the three months ended September 30, 1997 increased, when compared to the same period in 1996, due primarily to increases in general and administrative, depreciation and interest expenses, partially offset by decreases in maintenance and real estate tax expenses. Costs incurred in connection with the operation of the Partnership, including the preparation of reports and other communications to investors caused general and administrative expense to increase. Depreciation expense increased in conjunction with increased capital improvements completed at the Partnership's properties in recent years. The increase in interest expense was due to the refinancing of the mortgage note payable at Courtyards Village. Maintenance expense decreased due to higher 1996 expenditures at Courtyards Village and Nora Corners for landscaping and exterior painting, respectively. Real estate taxes decreased due to the adjustment of Nora Corners's and Windsor Apartments's real estate taxes in the third quarter of 1997 to reflect expected tax billings. Total expenses for the nine months ended September 30, 1997 increased when compared to the same period in 1996. Maintenance, general and administrative and depreciation expenses all increased during this period. Maintenance expense increased as a result of preventive pest control at Windsor Apartments and landscaping at Courtyards Village. The rise in general and administrative expense was caused by the costs incurred in connection with the operation of the Partnership, as discussed above, as well as 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: November 12, 1997