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 31,1999 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.) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (Zip Code) (617) 523-7722 (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 (Unaudited) March 31, December 31, 1999 1998 Multi-family apartment complexes, net of accumulated depreciation of $13,112,247 and $12,751,953, respectively $ 9,223,639$ 9,510,531 Cash and cash equivalents (Note 2) 490,870 629,483 Cash restricted for tenant security deposits 26,768 26,606 Replacement reserve escrow 33,754 21,160 Prepaid expenses and other assets 462,893 603,914 Deferred expenses, net of accumulated amortization of $142,472 and $132,823, respectively 173,183 182,832 Total assets $ 10,411,107$ 10,974,526 LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Liabilities: Mortgage notes payable (Note 3) $ 10,298,407$ 10,323,428 Accrued expenses and other liabilities 434,604 558,157 Total liabilities 10,733,011 10,881,585 Partners' equity (deficit) (Note 4): Investor Limited Partners (27,184 Units outstanding) 482,100 867,955 Original Limited Partner (503,684) (481,602) General Partners (300,320) (293,412) Total Partners' equity (deficit) (321,904) 92,941 Total liabilities and Partners' equity (deficit) $ 10,411,107$ 10,974,526 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended March 31, 1999 1998 Revenue: Rental $ 970,570 $ 994,935 Interest income (Note 2) 8,201 42,065 Total revenue 978,771 1,037,000 Expenses: Operating (Note 5) 229,879 276,415 Maintenance 93,547 48,114 Real estate taxes 136,200 80,153 General and administrative (Note 5) 24,336 27,787 Management fees (Note 5) 42,992 47,882 Depreciation and amortization 369,943 377,712 Interest 220,690 253,370 Total expenses 1,117,587 1,111,433 Loss before gain on sale of property (138,816) (74,433) Gain on sale of property (Note 3) - 676,360 Net income (loss) $ (138,816) $ 601,927 Allocation of net income (loss) (Note 4): Investor Limited Partners (27,184 Units outstanding): Loss before gain on sale of property$(137,428) $ (73,689) Gain on sale of property - 669,597 Net income (loss) $ (137,428) $ 595,908 Investor Limited Partners, Per Unit: Loss before gain on sale of property$ (5.06) $ (2.71) Gain on sale of property - 24.63 Net income (loss) $ (5.06) $ 21.92 Original Limited Partner: Loss before gain on sale of property$ - $ - Gain on sale of property - - Net income (loss) $ - $ - General Partners: Loss before gain on sale of property$(1,388) $ (744) Gain on sale of property - 6,763 Net income (loss) $ (1,388) $ 6,019 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, 1999 1998 Cash flows from operating activities: Net income (loss) $ (138,816)$ 601,927 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Interest earned on replacement reserve escrow(145) - Depreciation and amortization 369,943 377,712 Gain on sale of property - (676,360) Changes in assets and liabilities: Increase in restricted cash for tenant security deposits (162) (150) Decrease in prepaid expenses and other assets 141,021 199,282 Decrease in accrued expenses and other liabilities (120,507) (301,964) Net cash provided by operating activities 251,334 200,447 Cash flows from investing activities: Deposits to replacement reserve escrow (12,600) - Withdrawals from replacement reserve escrow 151 - Additions to fixed assets (73,402) (171,343) Increase (decrease) in accrued expenses and other liabilities related to fixed asset additions (3,046) 2,421 Proceeds from sale of property, net - 6,514,727 Net cash provided by (used in) investing activities (88,897) 6,345,805 Cash flows from financing activities: Repayment of mortgage note payable - (4,084,038) Principal payments on mortgage notes payable (25,021) (22,971) Increase in deferred expenses - (15,496) Distributions (276,029) (302,044) Net cash used in financing activities (301,050)(4,424,549) Net increase (decrease) in cash and cash equivalents (138,613) 2,121,703 Cash and cash equivalents, beginning of period 629,483 2,254,160 Cash and cash equivalents, end of period $ 490,870$4,375,863 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, 1998 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 March 31, 1999 and its results of operations and cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 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, 1999 1998 Cash and money market accounts $ 341,360 $ 479,625 Commercial paper 149,510 149,858 $ 490,870 $ 629,483 (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 $224,512. For financial reporting purposes, the Partnership realized a gain of $676,360 on the sale as of March 31, 1998. The Partnership realized a final gain of $676,316 on the sale as of December 31, 1998. 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)Changes in Partners' Equity (Deficit) A summary of changes in Partners' equity (deficit) for the three months ended March 31, 1999 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1998$867,955 $(481,602)$(293,412) $ 92,941 Distributions (248,427) (22,082) (5,520) (276,029) Net loss (137,428) - (1,388) (138,816) Balance at March 31, 1999 $482,100 $(503,684)$(300,320)$ (321,904) (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 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. Amounts accrued or paid to the General Partners' affiliates were as follows: For the Three Months Ended March 31, 1999 1998 Property management fees $ 42,992 $ 47,882 Expense reimbursements 33,967 28,704 Charged to operations $ 76,959 $ 76,586 Expense reimbursements due from affiliates of $165,751 and $239,514 were included in prepaid expenses and other assets at March 31, 1999 and December 31, 1998, 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. Due to the special distribution in 1998, a result of the sale of Nora Corners, and the subsequent decrease in the Investor Limited Partners' capital, the semiannual distributions were decreased from $20.00 per Unit in 1998 to $18.28 per Unit, beginning with the distribution paid in February, 1999. 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 $224,512 (see Note 3). The Partnership's apartment markets are currently experiencing an increase in competition from recently renovated existing properties and new construction. The General Partners are in the process of evaluating strategies to improve the competitiveness of the Partnership's properties. The General Partners of the Partnership have conducted an assessment of the Partnership's core internal and external computer information systems and have taken the further necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. In this regard, the General Partners of the Partnership, along with certain affiliates, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The General Partners completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the General Partners have generated operating efficiencies and believe their financial accounting operating systems are Year 2000 ready. Costs incurred by the Partnership are not significant to date. There are no other systems or software that the Partnership is using at the present time. Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES Liquidity and Capital Resources, Continued The General Partners of the Partnership are currently in the process of identifying, evaluating and remedying the Partnership's Year 2000 compliance issues with respect to its non-financial systems, such as computer controlled elevators, boilers, chillers or other miscellaneous systems. The General Partners are in the process of completing the Partnership's Year 2000 compliance initiatives at its properties. Based on their identification and assessment efforts to date, the General Partners believe that certain of the computer equipment and software the Partnership currently uses will require modification or replacement. However, the General Partners do not believe that the future efforts to achieve the Partnership's Year 2000 compliance initiatives will result in material cost to the Partnership or significantly interrupt services or operations. The General Partners of the Partnership are in the process of evaluating the potential adverse impact that could result from the failure of material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors to be Year 2000 ready. No estimate can be made at this time as to the impact of the readiness of such third parties. However, if any of the third party service providers cease to conduct business due to Year 2000 related problems, the General Partners expect to be able to contract with alternate providers without experiencing any material adverse effects on the Partnership's financial condition and results of operations. The Partnership is in the process of coordinating their contingency plan with the property manager in charge of operations. 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, 1999 and 1998. The sale of Nora Corners on January 30, 1998, significantly impacts the comparability of the Partnership's operations between the two periods. Net income, net of Nora Corners's activity, decreased during the three months ended March 31, 1999 as compared to the three months ended March 31, 1998, as total expenses increased and total revenue decreased. Rental revenue increased as a result of rental rate increases implemented at both Courtyards and Windsor Apartments. However, this was offset by a decrease in interest income due to higher average cash and cash equivalent balances available for investment in 1998, as a result of the sale of Nora Corners. Total expenses for the three months ended March 31, 1999, net of Nora Corners's activity, increased when compared to the same period in 1998, due primarily to increases in maintenance, real estate taxes and depreciation expenses, partially offset by a decrease in operating expense. Maintenance expense increased primarily due to payment of the insurance deductible for damage from a December, 1998 fire at Windsor Apartments and snow removal at Courtyards Apartments from a severe 1999 winter season in the Chicago area. Real estate tax expense increased as a result of a reassessment of Windsor Apartments's property value in 1998 by the local taxing authority. Depreciation expense increased in conjunction with increased capital improvements completed at the Partnership's properties. The increases discussed above were offset by a decrease in operating expense as a result of a reduction in insurance liability and workers compensation expense at the Partnership's properties, due to lower claims experience. 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: May 14, 1999