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 March 31, 1998 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.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 March 31, December 31, 1998 1997 Real estate assets: Multi-family apartment complexes, net of accumulated depreciation of $11,737,589 and $11,454,014, respectively $ 8,866,889 $ 9,009,457 Retail center (Note 3) - 5,673,137 Total real estate assets 8,866,889 14,682,594 Cash and cash equivalents (Note 2) 4,375,863 2,254,160 Cash restricted for tenant security deposits 26,130 25,980 Prepaid expenses and other assets 408,278 742,453 Deferred expenses, net of accumulated amortization of $103,874 and $132,911, respectively (Note 4) 211,781 290,423 Total assets $ 13,888,941$ 17,995,610 LIABILITIES AND PARTNERS' EQUITY Liabilities: Mortgage notes payable (Notes 3 and 4) $ 10,395,362$ 14,502,371 Accrued expenses and other liabilities 509,342 808,885 Total liabilities 10,904,704 15,311,256 Partners' equity (deficit) (Note 5): Investor Limited Partners (27,184 Units outstanding) 3,703,426 3,379,358 Original Limited Partner (457,438) (433,275) General Partners (261,751) (261,729) Total Partners' equity 2,984,237 2,684,354 Total liabilities and Partners' equity $ 13,888,941$ 17,995,610 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 Ended March 31, 1998 1997 Revenue: Rental $ 994,935 $1,196,040 Interest income 42,065 15,313 Total revenue 1,037,000 1,211,353 Expenses: Operating (Note 6) 276,415 281,971 Maintenance 48,114 66,095 Real estate taxes 80,153 127,821 General and administrative (Note 6) 27,787 37,723 Management fees (Note 6) 47,882 50,088 Depreciation and amortization 377,712 336,571 Interest (Note 4) 253,370 273,480 Total expenses 1,111,433 1,173,749 Income (loss) before gain on sale of property (74,433) 37,604 Gain on sale of property (Note 3) 676,360 - Net income $ 601,927 $ 37,604 Allocation of net income (Note 5): Investor Limited Partners (27,184 Units outstanding): Income (loss) before gain on sale of property $ (73,689) $ 33,844 Gain on sale of property 669,597 - Net income $ 595,908 $ 33,844 Investor Limited Partners Per Unit: Income (loss) before gain on sale of property $ (2.71) $ 1.24 Gain on sale of property 24.63 - Net income $ 21.92 $ 1.24 Original Limited Partner: Income (loss) before gain on sale of property $ - $ 3,008 Gain on sale of property - - Net income $ - $ 3,008 General Partners: Income (loss) before gain on sale of property $ (744) $ 752 Gain on sale of property 6,763 - Net income $ 6,019 $ 752 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 Three Months Ended March 31, 1998 1997 Operating activities: Net income $ 601,927$ 37,604 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 377,712 336,571 Gain on sale of property (676,360) - Changes in assets and liabilities: Increase in cash restricted for tenant security deposits (150) (138) Decrease in prepaid expenses and other assets 199,282 39,802 Decrease in accrued expenses and other liabilities (301,964) (83,265) Net cash provided by operating activities 200,447 330,574 Investing activities: Deposits to replacement reserve escrow - (6,000) Withdrawals from replacement reserve escrow - 3,877 Additions to fixed assets (171,343) (94,355) Increase (decrease) in accrued expenses and other liabilities related to fixed asset additions 2,421 (843) Proceeds from sale of property, net 6,514,727 - Net cash provided by (used in) investing activities 6,345,805 (97,321) Financing activities: Repayment of mortgage note payable (4,084,038) - Principal payments on mortgage notes payable (22,971) (47,842) Increase in deferred expenses (15,496) - Distributions (302,044) (302,044) Net cash used in financing activities (4,424,549) (349,886) Net increase (decrease) in cash and cash equivalents 2,121,703 (116,633) Cash and cash equivalents, beginning of period 2,254,160 1,177,332 Cash and cash equivalents, end of period $4,375,863$1,060,699 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 Consolidated Financial Statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997 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 March 31, 1998 and its results of operations and cash flows for the three months ended March 31, 1998 and 1997. The results of operations for the three months ended March 31, 1998 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: March 31, December 31, 1998 1997 Cash and money market accounts $ 4,375,863 $ 1,857,152 Commercial paper - 397,008 $ 4,375,863 $ 2,254,160 (3)Sale of Property On January 30, 1998, the Partnership sold Nora Corners Shopping Center ("Nora Corners") to unaffiliated third parties. Nora Corners was included in a package with thirteen other properties owned by affiliates of the General Partners. The total selling price of the fourteen properties was $138,000,000, of which the Partnership received $6,604,300, less repayment of the existing mortgage note and interest of $4,114,668 and its share of closing costs of $89,573. For financial reporting purposes, the Partnership realized a gain of $676,360 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. Nora Corners was situated on 11.21 acres of land, seven acres of which were owned by certain non-affiliated third parties. These seven acres of land were leased to the Partnership subject to a 99-year land lease which expired in 2061. The land lease required annual rental payments of $17,280 from 1987 through 2012. On January 30, 1998, in conjunction with the sale of Nora Corners, the land lease was assigned to the purchaser of the property, under the terms of the land lease. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (4)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 $151,536 and to establish various escrows. (5) Changes in Partners' Equity A summary of changes in Partners' equity (deficit) for the three months ended March 31, 1998 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Equity Balance at December 31, 1997 $ 3,379,358$(433,275)$(261,729)$ 2,684,354 Distributions (271,840) (24,163) (6,041) (302,044) Gain on sale of property 669,597 - 6,763 676,360 Net loss (73,689) - (744) (74,433) Balance at March 31, 1998 $ 3,703,426$(457,438)$(261,751)$ 2,984,237 (6)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 which was under management until January 30, 1998 (see Note 3), 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 administrative expenses. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (6) Related Party Transactions, Continued Amounts accrued or paid to the General Partners' affiliates were as follows: For the Three Months Ended March 31, 1998 1997 Property management fees $ 47,882 $ 50,088 Expense reimbursements 28,704 37,561 Charged to operations $ 76,586 $ 87,649 Expense reimbursements due from affiliates of $186,964 and $78,010 were included in prepaid expenses and other assets at March 31, 1998 and December 31, 1997, respectively. In addition to the amounts above, costs paid to the General Partners' affiliates associated with the sale of Nora Corners were $4,171 during the three months ended March 31, 1998. 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 January 30, 1998, the General Partners sold Nora Corners to unaffiliated third parties. The property was included in a package with thirteen other properties owned by affiliates of the General Partners. The total selling price of the fourteen properties was $138,000,000, of which the Partnership received $6,604,300 for the sale of its property, less the payoff of the mortgage note and its share of the closing costs of $89,573 (see Note 3). The Partnership anticipates making a special distribution of $77.95 per Unit in the second quarter of 1998, based upon approximately 90% of the proceeds of the sale. The remaining proceeds will be retained to fund liabilities of the Partnership and reserves for contingent liabilities. The balance of the reserves remaining after satisfaction of such contingencies will be distributed in accordance with the Partnership Agreement. In order to remain competitive in their respective markets, the Partnership's properties have spent approximately $171,000 to date and are anticipated to spend approximately $1,714,000 for fixed assets in 1998, primarily funded from 1997 refinancing proceeds from Courtyards Village East Apartments ("Courtyards"). These improvements include an extensive $1,245,000 rehabilitation project at Courtyards, interior and exterior enhancements, carpeting and vinyl flooring upgrades and roofing at Windsor Apartments. Operations The following discussion relates to the operations of the Partnership and its properties (Courtyards and Windsor Apartments) for the three months ended March 31, 1998 and 1997. The sale of Nora Corners on January 30, 1998, significantly impacts the comparability of the Partnership's operations between the two periods. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES Operations, Continued Net income, net of Nora Corners's activity, decreased during the three months ended March 31, 1998 as compared to the three months ended March 31, 1997, 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 both Courtyards and Windsor Apartments. Interest income increased due to higher average cash and cash equivalent balances available for investment, as a result of the sale of Nora Corners. Proceeds of approximately $2,400,000 were received from the sale. Total expenses for the three months ended March 31, 1998, net of Nora Corners's activity, increased when compared to the same period in 1997, due primarily to increases in depreciation and interest expenses. Depreciation expense increased in conjunction with increased capital improvements completed at the Partnership's properties. Interest expense rose as a result of the refinancing of the Courtyards mortgage note in 1997 (see Note 4 for further discussion of this matter). 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 SeniorSecurities 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 (a)Exhibits Response: None (b)Reports on Form 8-K Date Event Reported Financial Statements Filed January 30, 1998 Disposition of Nora CornersPro Forma Balance Sheet at Shopping Center. September 30, 1997. Pro Forma Statements of Operations for the nine months ended September 30, 1997 and for the year ended December 31, 1996. 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: May 13, 1998