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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
Aggregate market value of voting securities held by non-affiliates: Not applicable.
Documents incorporated by reference: see Part IV, Item 14
The exhibit index is located on pages 8-10
PART I This Form 10-K 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. ITEM 1. BUSINESS - ------ On December 20, 1985, The Krupp Corporation and The Krupp Company Limited Partnership-IV (the "General Partners") formed Krupp Insured Plus Limited Partnership (the "Partnership"), a Massachusetts Limited Partnership. The Partnership raised approximately $149 million through a public offering of limited partner interests evidenced by units of depositary receipts ("Units") and used the net proceeds primarily to acquire participating insured mortgages ("PIMs") and mortgage backed securities ("MBS"). The Partnership considers itself to be engaged in the industry segment of investment in mortgages. The Partnership's investments in PIMs consist of a securitized multi-family first mortgage loan or a sole participation interest in a Department of Housing and Urban Development ("HUD") multi-family insured first mortgage loan, and participation interests in the current revenue stream of the mortgaged property and any increase in the mortgaged property's value above certain specified base levels. The Partnership provided the funds for the first mortgage loan made to the borrower by acquiring either a securitized first mortgage loan ("MBS"), originated under the lending program of Fannie Mae or a sole participation interest in a first mortgage loan originated under the Federal Housing Administration ("FHA") lending program (collectively the "insured mortgages"). The Partnership receives the participation interests in the mortgaged property as additional consideration for providing the funds for the first mortgage loan and accepting a below market interest rate on the insured mortgage. The borrower conveyed the participation interests to the Partnership through either a subordinated promissory note and mortgage or a shared income and appreciation agreement. Fannie Mae guarantees the principal and interest payments for the Fannie Mae insured mortgage. HUD insures the first mortgage loan originated under the FHA lending program. The participation interests conveyed to the Partnership by the borrower are neither insured nor guaranteed. The Partnership also has investments in MBS backed by single-family or multi-family mortgage loans issued or originated by the Government National Mortgage Association ("GNMA"), Fannie Mae or the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC guarantee the principal and interest on the Fannie Mae and FHLMC MBS, respectively. GNMA guarantees the timely payment of principal and interest on its MBS and HUD insures the pooled mortgage loans underlying the GNMA MBS. Although the Partnership will terminate no later than December 31, 2025 the Partnership anticipates realizing the value of the PIMs through repayment well before this date. Therefore, dissolution of the Partnership should occur significantly prior to December 31, 2025. The Partnership's investments are not subject to seasonal fluctuations. However, the realization of the participation features of the PIMs are subject to similar risks associated with equity real estate investments, including: reliance on the owner's operating skills, ability to maintain occupancy levels, control operating expenses, maintain the property and provide adequate insurance coverage; adverse changes in general economic conditions, adverse local conditions, and changes in governmental regulations, real estate zoning laws, or tax laws; and other circumstances over which the Partnership may have little or no control. The requirements for compliance with federal, state and local regulations to date have not adversely effected the Partnership's operations and the Partnership does not presently anticipate adverse effects in the future. As of December 31, 2001, there were no personnel directly employed by the Partnership. ITEM 2. PROPERTIES - ------ None. ITEM 3. LEGAL PROCEEDINGS - ------ There are no material pending legal proceedings to which the Partnership is a party or to which any of its investments is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------ There currently is no established trading market for the Units. The number of investors holding Units as of December 31, 2001 was approximately 5,500. One of the objectives of the Partnership is to provide quarterly distributions of cash flow generated by its investments in mortgages. The Partnership presently anticipates that future operations will continue to generate cash available for distribution. Adjustments may be made to the distribution rate in the future due to the realization and payout of the existing mortgages. During August 2001, the Partnership made a special distribution of $1.25 per Limited Partner interest from the principal proceeds and prepayment premium received from the Boulders Apartments MBS. During November 2000, the Partnership made a special distribution of $.33 per Limited Partner interest from the principal proceeds and prepayment premium received from the Chateau Bijou MBS. During January 2000, the Partnership made a special distribution of $1.30 per Limited Partner interest from the principal proceeds and Shared Appreciation Interest from the LaCosta PIM. The Partnership may make special distributions in the future if MBS or PIMs prepay or a sufficient amount of cash is available from MBS and PIM principal collections. The Partnership made the following distributions, in quarterly installments, and special distributions, to its Partners during the two years ended December 31, 2001 and 2000: 2001 2000 Amount Per Unit Amount Per Unit Distributions: Limited Partners $ 3,000,040 $ .40 $ 5,700,076 $ .76 General Partners 78,220 - 97,014 - ------------ ------------ 3,078,260 5,797,090 ------------ ------------ Special Distributions: Limited Partners 9,375,124 $ 1.25 12,225,162 $ 1.63 ------------ ------------ Total Distributions $ 12,453,384 $ 18,022,252 ============ ============ ITEM 6. SELECTED FINANCIAL DATA - ------ The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Supplementary Data, which are included in Item 7 and Item 8, (Appendix A) of this report, respectively. 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total revenues $ 3,022,454 $ 3,587,833 $ 4,215,833 $ 4,823,813 $ 6,078,663 Net income 2,540,547 3,038,185 3,610,232 4,171,014 4,743,768 Net income allocated to: Limited Partners 2,464,331 2,947,039 3,501,925 4,045,884 4,601,455 Average Per Unit .33 .39 .47 . 54 . 61 General Partners 76,216 91,146 108,307 125,130 142,313 Total assets at: December 31 29,901,042 39,651,355 54,564,577 57,367,612 67,795,436 Distributions to: Limited Partners 3,000,040 5,700,076 5,700,076 5,700,075 5,700,093 Average per Unit .40 .76 .76 .76 .76 Special to Limited Partners 9,375,124 12,225,162 - 8,400,111 4,575,060 Average per Unit 1.25 1.63 - 1.12 .61 General Partners 78,220 97,014 112,626 137,665 172,798 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------ Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Partnership's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, federal, state or local regulations; adverse changes in general economic or local conditions; prepayments of mortgages; failure of borrowers to pay participation interests due to poor operating results at properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Partnership and its Affiliates, including the General Partners. Liquidity and Capital Resources At December 31, 2001 the Partnership had liquidity consisting of cash and cash equivalents of approximately $1.4 million as well as the cash flow provided by its investments in the PIMs and MBS. The Partnership anticipates that these sources will be adequate to provide the Partnership with sufficient liquidity to meet its obligations as well as to provide distributions to its investors. The most significant demand on the Partnership's liquidity is quarterly distributions paid to investors, which are approximately $750,000 per quarter. Funds for the quarterly distributions come from the monthly principal and interest payments received on the PIMs and MBS, the principal prepayments of the PIMs and MBS, interest earned on the Partnership's cash and cash equivalents and cash reserves. The portion of distributions attributable to the principal collections and cash reserves reduces the capital resources of the Partnership. As the capital resources of the Partnership decrease, the total cash flows to the Partnership also will decrease and over time will result in periodic adjustments to the distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment is necessary based on projected future cash flows. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions. Based on current projections, the General Partners expect that the Partnership will reduce the distribution rate of $.10 per Limited Partner interest per quarter to $.06 per Limited Partner interest per quarter with the May 2002 distribution. In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's investments in the PIMs also may provide additional income through a participation interest in the underlying properties. However, this payment is neither guaranteed nor insured and depends on the successful operations of the underlying properties. The Partnership received a prepayment of the Royal Palm Place PIM. On January 2, 2002, the Partnership received $378,480 of Shared Appreciation Interest and $121,490 of Minimum Additional Interest. On February 27, 2002 the Partnership received $5,563,531 representing the principal proceeds on the first mortgage. The Partnership has declared a special distribution of $.80 per Limited Partner interest consisting of Shared Appreciation Interest and prepayment proceeds which will be paid in the first quarter of 2002. The Partnership received a payoff of the Boulders Apartments MBS on July 9, 2001 for $9,045,042. The Partnership also received a prepayment premium of $306,000 from this payoff. On August 17, 2001, the Partnership paid a special distribution of $1.25 per Limited Partner interest from the proceeds received. The Partnership received a payoff from the Chateau Bijou MBS on September 19, 2000 for $2,266,064. During October the Partnership received a 9% prepayment premium of $203,946 from this payoff. The Partnership paid a special distribution in November of $.33 per Limited Partner interest from the proceeds received. In December 1999, the Partnership received a prepayment in the amount of $9,746,923 representing the outstanding principal balance due on the La Costa PIM. The Borrower defaulted on the first mortgage loan underlying the PIM in June of 1999. The Partnership continued to receive its full principal and interest payments until the default was resolved as GNMA guaranteed those payments to the Partnership. The Partnership did not receive any participation interest as a result of this default. However, the Partnership received $10,000 from the Borrower to release the Subordinated Promissory Note. This payment was classified as Shared Appreciation Interest. On January 11, 2000, the Partnership paid a special distribution to the investors of $1.30 per Limited Partner interest. With the payoff of the Royal Palm Place PIM in January, 2002, the Partnership's only remaining PIM investment is backed by the first mortgage loan on Vista Montana. Presently, the General Partners do not expect Vista Montana to pay the Partnership any participation interest or to be sold or refinanced during 2002. However, if favorable market conditions provide the borrower an opportunity to sell the property, there are no contractual obligations remaining that would prevent a prepayment of the underlying first mortgage. Vista Montana operates under a long-term restructure program. The Partnership agreed in 1993 to change the original participation terms and to permanently reduce the rate on the first mortgage loan to 7.375% per annum when construction was significantly delayed. The borrower also raised additional equity at the time of the modification by selling investment tax credits. These funds have been held in escrow and are used to fund operating deficits. Although occupancy in the Phoenix sub-market is generally in the low 90% range, the property is currently 80% occupied because of a fire. Repairs to the property are underway and will be covered by the borrower's property insurance. The Partnership has the option to call its remaining PIM by accelerating the maturity date of the loan. The Partnership will determine the merits of exercising the call option as economic conditions warrant. Such factors as the condition of the asset, local market conditions, interest rates and available financing will have an impact on this decision. Critical Accounting Policy The Partnership's critical accounting policy relates primarily to revenue recognition related to the participation feature of the Partnership's PIM investments. The Partnership's policy is as follows: Basic interest on PIMs is recognized at the stated rate of the Federal Housing Administration insured mortgage (less the servicer's fee) or the stated coupon rate of the Fannie Mae MBS. The Partnership recognizes interest related to the participation features when the amount becomes fixed and the transaction that gives rise to such amount is consummated. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by GNMA, Fannie Mae, FHLMC or HUD and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represents interest in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government. The Partnership includes in cash and cash equivalents approximately $1.1 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization. Interest Rate Risk The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 2001, the Partnership's PIMs and MBS comprise the majority of the Partnership's assets. Decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold all of its investments to expected maturity. The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, when setting regular distribution policy. For MBS, the fund forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they mature. The table below provides information about the Partnership's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates ("WAIR") by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments. Expected maturity dates ($ in thousands) 2002 2003 2004 2005 2006 Thereafter Total Fair Face Value Value Interest-sensitive assets: MBS $ 256 $ 231 $ 211 $ 194 $ 181 $ 7,844 $ 8,917 $ 9,411 WAIR 8.41% 8.41% 8.41% 8.41% 8.41% 8.41% 8.41% PIMs 5,667 111 120 129 139 12,613 18,779 19,649 WAIR 7.38% 7.38% 7.38% 7.38% 7.38% 7.38% 7.67% -------- -------- ------- ------- -------- ---------------- ------------- -------------- Total Interest- sensitive assets $ 5,923 $ 342 $ 331 $ 323 $ 320 $ 20,457 $ 27,696 $ 29,060 ======== ======== ======= ======= ======== ================ ============= ============== Results of Operations The following discussion relates to the operation of the Partnership during the years ended December 31, 2001, 2000 and 1999. (Amounts in thousands) 2001 2000 1999 ---- ---- ---- Interest income on PIMs: Basic interest $ 1,446 $ 1,423 $ 2,085 Participation interest 306 214 - Interest income on MBS 1,171 1,702 1,900 Other interest income 100 249 231 Partnership expenses (390) (449) (505) Amortization of prepaid fees and expenses (92) (101) (101) ------- -------- -------- Net income $ 2,541 $ 3,038 $ 3,610 ======= ======== ======== Net income decreased for 2001 when compared with 2000 primarily due to decreases in interest income on MBS and other interest income. This is partially offset by an increase in participation interest and a decrease in asset management fees. Interest income on MBS decreased in 2001 when compared to 2000 primarily due to the payoffs of the Boulders Apartments MBS in July 2001 and the Chateau Bijou MBS in September of 2000. Other interest income decreased due to lower average interest rates earned on cash balances available for short-term investing in 2001 as compared with 2000. Participation interest increased due to the collection of a prepayment premium from the Boulders Apartments MBS payoff in July 2001. The decrease in asset management fees is due to the Partnership's asset base declining. Net income decreased for 2000 when compared with 1999 due primarily to the decrease in interest income on PIMs and MBS. Basic interest on PIMs decreased in 2000 as compared to 1999 due primarily to the prepayment of the LaCosta PIM in December 1999. MBS interest income decreased in 2000 as compared to 1999 primarily due to principal collections received on the remaining MBS investments and the Chateau Bijou MBS payoff in September 2000. Participation interest increased in 2000 compared with 1999 due to the Chateau Bijou MBS prepayment premium and Shared Appreciation Interest from the LaCosta PIM payoff received in 2000. Expenses decreased in 2000 as compared with 1999 due primarily to lower asset management fees caused by a declining asset base. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ See Appendix A to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------ None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- The Partnership has no directors or executive officers. Information as to the directors and executive officers of The Krupp Corporation, which is a General Partner of the Partnership and is the general partner of The Krupp Company Limited Partnership-IV, the other General Partner of the Partnership, is as follows: Position with Name and Age The Krupp Corporation Douglas Krupp (55) Co-Chairman, President and Director George Krupp (57) Co-Chairman, President and Director Robert A. Barrows (44) Vice President and Chief Accounting Officer Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, investment sponsorship, venture capital investing, mortgage banking and financial management, and ownership of two operating companies through private equity investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969 and he has served as the Chief Executive Officer since 1992. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989. George Krupp is the Co-Founder and Co-Chairman of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, investment sponsorship, venture capital investing, mortgage banking and financial management, and ownership of two operating companies through private equity investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish High School in Waltham, Massachusetts since September of 1997. Mr. Krupp attended the University of Pennsylvania and Harvard University and holds a Master's Degree in History from Brown University. Douglas and George Krupp are brothers. Robert A. Barrows is Senior Vice President and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has held several positions within The Berkshire Group since joining the company in 1983 and is currently responsible for accounting, financial reporting and treasury functions for Berkshire Mortgage Finance. Prior to joining The Berkshire Group, he was an audit supervisor for Coopers and Lybrand L.L.P. in Boston. He received a B.S. degree from Boston College and is a Certified Public Accountant. ITEM 11. EXECUTIVE COMPENSATION - ------- The Partnership has no directors or executive officers. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- As of December 31, 2001 no person owned of record or was known by the General Partners to own beneficially more than 5% of the Partnership's 7,500,099 outstanding Units. The only interests held by management or its affiliates consist of its General Partner and Corporate Limited Partner Interests. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- Information required under this Item is contained in Note F to the Partnership's financial statements presented in Appendix A to this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K - ------- (a) 1. Financial Statements - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page F-2 of this report. 2. Financial Statement Schedule - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page F-2 of this report. All other schedules are omitted as they are not applicable, not required or the information is provided in the Financial Statements or the Notes thereto. (b) Reports on Form 8-K During the last quarter of the year ended December 31, 2001 the Partnership did not file any reports on Form 8-K. (c) Exhibits: Number and Description Under Regulation S-K The following reflects all applicable Exhibits required under Item 601 of Regulation S-K: (4) Instruments defining the rights of security holders including indentures: ------------------------------------------------------------------------ (4.1) Amended Agreement of Limited Partnership dated as of June 27, 1986 [Exhibit A to Prospectus included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 2, 1986 (File No. 33-2520)].* (4.2) Subscription Agreement whereby a subscriber agrees to purchase Units and adopts the provisions of the Amended Agreement of Limited Partnership [Exhibit D to Prospectus included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 2, 1986 (File No. 33-2520)].* (4.3) Eighth Amendment and Restatement of Certificate of Limited Partnership filed with the Massachusetts Secretary of State on February 6, 1987 [Exhibit 4.3 to Registrant's Report on Form 10-K for the year ended December 31, 1986 (File No. 33-2520)].* (10) Material Contracts: ------------------ Vista Montana (10.1) Subordinated Promissory Note, dated March 31, 1988, between VM Associates Limited Partnership, an Arizona Limited Partnership and GMAC Mortgage Corporation of PA. [Exhibit 19.7 to Registrant's Report on Form 10-Q for the Quarter Ended March 31, 1988 (File No. 0-15815)].* (10.2) Subordinated Multi-family Deed of Trust, dated March 31, 1988, between VM Associates Limited Partnership, an Arizona Limited Partnership, and GMAC Mortgage Corporation of PA [Exhibit 19.8 to Registrant's Report on Form 10-Q for the Quarter Ended March 31, 1988 (File No. 0-15815)].* (10.3) Assignment of Subordinated Deed of Trust, dated March 31, 1988, between GMAC Mortgage Corporation of PA, and Krupp Insured Plus-II Limited Partnership, a Massachusetts Limited Partnership. [Exhibit 19.9 to Registrant's Report on Form 10-Q for the Quarter Ended March 31, 1988 (File No. 0-15815)].* (10.4) Assignment of Closing Documents, dated July 12, 1988 by and between Krupp Insured Plus-II Limited Partnership ("KIP-II"), a Massachusetts limited partnership, and Krupp Insured Plus Limited Partnership ("KIP-I"), a Massachusetts limited partnership. [Exhibit 19.10 to Registrant's Report on Form 10-Q for the Quarter Ended June 30, 1988 (File No. 0-15815)].* (10.5) Deed of Trust, dated March 31, 1988 between VM Associates Limited Partnership, an Arizona limited partnership and Transamerica Title Insurance Company, a California corporation. [Exhibit 19.11 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.6) Deed of Trust Note, dated March 31, 1988, between VM Associates Limited Partnership, an Arizona limited partnership and GMAC Mortgage Corporation of PA, a Pennsylvania corporation. [Exhibit 19.12 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.7) Assignment of Mortgage and Collateral Documents, dated March 31, 1988 by and between Krupp Insured Plus-II Limited Partnership, a Massachusetts limited partnership and GMAC Mortgage Corporation of PA, a Pennsylvania corporation. [Exhibit 19.13 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.8) Servicing Agreement, dated March 31, 1988 by and between Krupp Insured Plus-II Limited Partnership, a Massachusetts limited partnership and GMAC Mortgage Corporation of PA, a Pennsylvania corporation. [Exhibit 19.14 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.9) Modification to the First mortgage loan and subordinated Promissory Note, dated June 7, 1993, by and between Krupp Insured Plus-II Limited Partnership and V.M. Associates Limited Partnership. [Exhibit 10.28 to Registrant's Report on Form 10-K for the Year Ended December 31, 1994 (File No. 0-15815)].* (10.10) Assignment of interest from Krupp Insured Plus Limited Partnership II to Krupp Insured Plus Limited Partnership, dated February 6, 1995. [Exhibit 10.29 to Registrant's Report on Form 10-K for the Year Ended December 31, 1994 (File No. 0-15815)].* Royal Palm Place (10.11) Supplement to Prospectus for FNMA Pool No. MB-109057. [Exhibit 10.30 to Registrant's Report on Form 10-K for the year ended December 31, 1995(File No. 0-15815)].* (10.12) Subordinated Multifamily Mortgage dated March 20, 1991 between Royal Palm Place, Ltd., a Florida limited partnership (the "Mortgagor") and Krupp Insured Plus-III Limited Partnership (the "Mortgagee"). [Exhibit 19.2 to Registrant's Report on Form 10-Q for the Quarter Ended June 30, 1991 (File No. 0-15815)].* (10.13) Amended and Restated Subordinated Promissory Note dated December 1, 1995 between Royal Palm Place, Ltd., a Florida limited partnership (the "Mortgagor") and Krupp Insured Plus-III Limited Partnership (the "Holder") [Exhibit 10.32 to Registrant's Report on Form 10-K for the year ended December 31, 1995(File No.0-15815)].* (10.14) Modification Agreement dated March 20, 1991 by and between Royal Palm Place, Ltd., a Florida limited partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.4 to Registrant's Report on Form 10-Q for the Quarter Ended June 30, 1991 (File No. 0-15815)].* (10.15) Participation Agreement dated March 20, 1991 between Krupp Insured Plus-III Limited Partnership and Krupp Insured Plus Limited Partnership. [Exhibit 19.1 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1991 (File No. 0-15815)].* * Incorporated by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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, on the 22nd day of March, 2002. KRUPP INSURED PLUS LIMITED PARTNERSHIP By: The Krupp Corporation, a General Partner By: /s/ Douglas Krupp ---------------------------------------- Douglas Krupp, Co-Chairman (Principal Executive Officer) and Director of The Krupp Corporation Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 22nd day of March, 2002. Signatures Title(s) - ---------- -------- /s/ Douglas Krupp Co-Chairman (Principal Executive Officer), President and Director of The Krupp - ------------------------------- Douglas Krupp Corporation, a General Partner of the Registrant. /s/ George Krupp Co-Chairman (Principal Executive Officer) and Director of The Krupp Corporation, George Krupp - ------------------------------- a General Partner of the Registrant /s/ Robert A. Barrows Vice President and Chief Accounting Officer of The Krupp Corporation, a - ------------------------------- Robert A. Barrows General Partner of the Registrant. APPENDIX A KRUPP INSURED PLUS LIMITED PARTNERSHIP FINANCIAL STATEMENTS AND SCHEDULE ITEM 8 of FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 2001 KRUPP INSURED PLUS LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Accountants F-3 Balance Sheets at December 31, 2001 and 2000 F-4 Statements of Income and Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999 F-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 2001, 2000 and 1999 F-6 Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 F-7 Notes to Financial Statements F-8 - F-15 All schedules are omitted as they are not applicable or not required, or the information is provided in the financial statements or the notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Insured Plus Limited Partnership: In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Krupp Insured Plus Limited Partnership (the "Partnership") at December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts March 22, 2002 KRUPP INSURED PLUS LIMITED PARTNERSHIP BALANCE SHEETS December 31, 2001 and 2000 ASSETS 2001 2000 ---- ---- Participating Insured Mortgages ("PIMs") (Notes B, C, H and I) $ 18,779,477 $ 18,875,248 Mortgage-Backed Securities and insured mortgage ("MBS") (Notes B, D and H) 9,410,920 18,864,480 ------------- ------------- Total mortgage investments 28,190,397 37,739,728 Cash and cash equivalents (Notes B and H) 1,422,582 1,460,786 Interest receivable and other assets 190,282 260,797 Prepaid acquisition fees and expenses, net of accumulated amortization of $785,095 and $725,937, respectively (Note B) 59,157 118,315 Prepaid participation servicing fees, net of accumulated amortization of $292,428 and $259,323, respectively (Note B) 38,624 71,729 ------------- ------------- Total assets $ 29,901,042 $ 39,651,355 ============= ============== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 17,877 $ 17,650 ------------- ------------- Partners' equity (deficit) (Notes A, E and I): Limited Partners 29,633,496 39,544,329 (7,500,099 Limited Partner interests outstanding) General Partners (249,219) (247,215) Accumulated Comprehensive Income (Note B) 498,888 336,591 ------------- ------------- Total Partners' equity 29,883,165 39,633,705 ------------- ------------- Total liabilities and Partners' equity $ 29,901,042 $ 39,651,355 ============= ============= The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ------------ ------------ ------------ Revenues: Interest income - PIMs Basic interest $ 1,446,220 $ 1,422,912 $ 2,085,273 Participation interest 306,000 213,946 - Interest income - MBS 1,170,585 1,701,993 1,899,734 Other interest income 99,649 248,982 230,826 ------------ ------------ ------------ Total revenues 3,022,454 3,587,833 4,215,833 ------------ ------------ ------------ Expenses: Asset management fee to an affiliate (Note F) 243,650 295,192 376,755 Expense reimbursements to affiliates (Note F) 53,989 56,015 42,279 Amortization of prepaid fees and expenses (Note B) 92,263 101,056 101,059 General and administrative 92,005 97,385 85,508 ------------ ------------ ------------ Total expenses 481,907 549,648 605,601 ------------ ------------ ------------ Net income (Note G) 2,540,547 3,038,185 3,610,232 Other Comprehensive Income: Net change in unrealized gain on MBS 162,297 72,745 (599,917) ------------ ------------ ------------ Total Comprehensive Income $ 2,702,844 $ 3,110,930 $ 3,010,315 ============ ============ ============ Allocation of net income (Notes E and G): Limited Partners $ 2,464,331 $ 2,947,039 $ 3,501,925 ============ ============ ============ Average net income per Limited Partner Interest $ .33 $ .39 $ .47 ============ ============ ============ (7,500,099 Limited Partner interests outstanding) General Partners $ 76,216 $ 91,146 $ 108,307 ============ ============ ============= The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999 Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity ------------- ------------ -------------- ------------- Balance at December 31, 1998 $ 56,720,679 $ (237,028) $ 863,763 $ 57,347,414 Net income 3,501,925 108,307 - 3,610,232 Quarterly distributions (5,700,076) (112,626) - (5,812,702) Change in unrealized gain on MBS - - (599,917) (599,917) ------------- ----------- ------------ ------------- Balance at December 31, 1999 54,522,528 (241,347) 263,846 54,545,027 Net income 2,947,039 91,146 - 3,038,185 Quarterly distributions (5,700,076) (97,014) - (5,797,090) Special distributions (12,225,162) - - (12,225,162) Change in unrealized gain on MBS - - 72,745 72,745 ------------- ----------- ------------ -------------- Balance at December 31, 2000 39,544,329 (247,215) 336,591 39,633,705 Net income 2,464,331 76,216 - 2,540,547 Quarterly distributions (3,000,040) (78,220) - (3,078,260) Special distribution (9,375,124) - - (9,375,124) Change in unrealized gain on MBS - - 162,297 162,297 ------------- ----------- ------------ ------------ Balance at December 31, 2001 $ 29,633,496 $ (249,219) $ 498,888 $ 29,883,165 ============= =========== ============ ============ The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ---- ---- ---- Operating activities: Net income $ 2,540,547 $ 3,038,185 $ 3,610,232 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 92,263 101,056 101,059 Shared Appreciation Interest and prepayment premiums (306,000) (213,946) - Premium amortization - 52,528 6,630 Changes in assets and liabilities: Decrease in interest receivable and other assets 70,515 59,197 47,786 Increase (decrease) in liabilities 227 (1,900) (648) ------------ ------------- ----------- Net cash provided by operating activities 2,397,552 3,035,120 3,765,059 ------------ ------------- ----------- Investing activities: Principal collections and prepayments on PIMs including Shared Appreciation Interest of $10,000 in 2000 95,771 167,751 10,041,106 Principal collections on MBS including a prepayment premium of $306,000 in 2001 and $203,946 in 2000. 9,921,857 3,278,080 1,355,494 ------------ ------------- ----------- Net cash provided by investing activities 10,017,628 3,445,831 11,396,600 ------------ ------------- ----------- Financing activities: Quarterly distributions (3,078,260) (5,797,090) (5,812,702) Special distributions (9,375,124) (12,225,162) - ------------ ------------- ------------ Net cash used for financing activities (12,453,384) (18,022,252) (5,812,702) ------------ ------------- ------------ Net (decrease) increase in cash and cash equivalents (38,204) (11,541,301) 9,348,957 Cash and cash equivalents, beginning of period 1,460,786 13,002,087 3,653,130 ------------ ------------- ----------- Cash and cash equivalents, end of period $ 1,422,582 $ 1,460,786 $ 13,002,087 ============ ============= ============ Non cash activities: Increase (decrease) in Fair Value of MBS $ 162,297 $ 72,745 $ (599,917) ============ ============= ============ The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS A. Organization Krupp Insured Plus Limited Partnership (the "Partnership") is a Massachusetts Limited Partnership. The Partnership was organized for the purpose of investing in multi-family loans and mortgage-backed securities. The General Partners of the Partnership are The Krupp Corporation and The Krupp Company Limited Partnership-IV and the Corporate Limited Partner is Krupp Depositary Corporation. The Partnership terminates on December 31, 2025, unless terminated earlier upon the occurrence of certain events as set forth in the Partnership Agreement. The Partnership commenced the public offering of Units on July 7, 1986 and completed its public offering having sold 7,499,999 Units for $149,489,830 net of purchase volume discounts of $510,150 as of January 27, 1987. In addition, Krupp Depositary Corporation owns 100 Units. B. Significant Accounting Policies The Partnership uses the following accounting policies for financial reporting purposes which differ in certain respects from those used for federal income tax purposes (Note G): Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"). MBS The Partnership, in accordance with Financial Accounting Standards Board's Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), classifies its MBS portfolio as available-for-sale. As such the Partnership carries its MBS at fair market value and reflects any unrealized gains (losses) as a separate component of Partners' equity. The Partnership amortizes purchase premiums or discounts over the life of the underlying mortgages using the effective interest method. PIMs The Partnership accounts for its MBS portion of a PIM in accordance with FAS 115 under the classification of held to maturity. The Partnership carries the Fannie Mae MBS at amortized cost. The insured mortgage portion of the Federal Housing Administration PIM (FHA PIM) is carried at amortized cost. The Partnership does not establish loan loss reserves as its investments are fully insured by the FHA. Basic interest on PIMs is recognized at the stated rate of the Federal Housing Administration insured mortgage (less the servicer's fee) or the stated coupon rate of the Fannie Mae MBS. The Partnership recognizes interest related to the participation features when the amount becomes fixed and the transaction that gives rise to such amount is consummated. Cash and Cash Equivalents The Partnership includes all short-term investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. The Partnership invests its cash primarily in commercial paper and money market funds with a commercial bank and has not experienced any loss to date on its invested cash. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued B. Significant Accounting Policies, continued Prepaid Fees and Expenses Prepaid fees and expenses represent prepaid acquisition fees and expenses and prepaid participation servicing fees paid for the acquisition and servicing of PIMs. The Partnership amortizes the prepaid acquisition fees and expenses using a method that approximates the effective interest method over a period of ten to twelve years, which represents the estimated life of the underlying mortgage. The Partnership amortizes the prepaid participation servicing fees using a method that approximates the effective interest method over a ten year period beginning from the acquisition of the Fannie Mae MBS or final endorsement of the FHA loan. Upon the repayment of a PIM, any unamortized acquisition fees and expenses and unamortized participation servicing fees related to such loan are expensed. Income Taxes The Partnership is not liable for federal or state income taxes because Partnership income is allocated to the partners for income tax purposes. If the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and such an examination results in a change in Partnership taxable income, such change will be reported to the partners. Estimates and Assumptions The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the period. Actual results could differ from those estimates. C. PIMs At December 31, 2001 and 2000, the Partnership had investments in two PIMs. The Partnership's PIMs consist of one Fannie Mae MBS representing the securitized first mortgage loan on the underlying property and one participation interest in a first mortgage loan originated under the FHA lending program on the underlying property (collectively the "insured mortgages"). The Partnership also has participation interests in the revenue stream and appreciation of the underlying properties above specified thresholds. The borrower conveys these participation features to the Partnership generally through a subordinated promissory note and mortgage (the "Agreement"). The Partnership receives monthly payments of principal and basic interest that are guaranteed by Fannie Mae on the MBS and insured by HUD on the FHA mortgage loan. The Partnership may receive income related to its participation interests in the underlying property, however, these amounts are neither insured nor guaranteed. Generally, the participation features consist of the following: (i) "Minimum Additional Interest" which is at the rate of .5% per annum calculated on the unpaid principal balance of the first mortgage on the underlying property, (ii) "Shared Income Interest" which is 30% of the monthly gross rental income generated by the underlying property in excess of a specified base, limited to the extent that it exceeds the amount of Minimum Additional Interest earned during such month or 25% of distributable surplus cash and (iii) "Shared Appreciation Interest" which is 30% of any increase in the value of the underlying property in excess of a specified base or 25% of the net sales proceeds. Payment of participation interest from the operations of the property is limited to 50% of net revenue or Surplus Cash as defined by Fannie Mae or HUD, respectively. The aggregate amount of Minimum Additional Interest, Shared Income Interest and Shared Appreciation Interest payable by the underlying borrower on the maturity date generally cannot exceed 50% of any increase in value of the property over certain thresholds. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued C. PIMs, continued Shared Appreciation Interest is payable when one of the following occurs: (1) the sale of the underlying property to an unrelated third party on a date which is later than five years from the date of the Agreement, (2) the maturity date or accelerated maturity date of the Agreement, or (3) prepayment of amounts due under the Agreement and the insured mortgage. The borrower may prepay the first mortgage loan subject to a 9% prepayment premium in years six through nine, a 1% prepayment premium in year ten and no prepayment premium thereafter. Under the Agreement, upon giving twelve months written notice, the Partnership can accelerate the maturity date of the Agreement to a date not earlier than ten years from the date of the Agreement for (a) the payment of all participation interest due under the Agreement as of the accelerated maturity date, or (b) the payment of all participation interest due under the Agreement plus all amounts due on the first mortgage note on the property. In December 1999, the Partnership received a prepayment in the amount of $9,746,923 representing the outstanding principal balance due on the La Costa PIM. The Borrower defaulted on the first mortgage loan underlying the PIM in June of 1999. The Partnership continued to receive its full principal and interest payments until the GNMA mortgagee exercised its right to prepay the GNMA MBS due to the continuing default of the underlying first mortgage loan. Subsequent to the payoff, the Partnership received $10,000 from the Borrower to release the Subordinated Promissory Note. This payment has been classified as Shared Appreciation Interest. On January 11, 2000, the Partnership paid a special distribution to the investors of $1.30 per Limited Partner interest. At December 31, 2001 and 2000 there were no loans within the Partnership's portfolio that were delinquent as to principal or interest. The Partnership's PIMs consist of the following at December 31, 2001 and 2000: Approximate Original Interest Maturity Monthly Investment Basis at PIMs Face Amount Rates (a) Dates Payment December 31, - ---- ------------ --------- ----------- ----------- --------------------------------- 2001 2000 FHA Vista Montana Apts. Val Vista Lakes, Az. $ 13,814,400 7.375% 12/1/33 90,000 $ 13,215,946 $ 13,311,717 (b) Fannie Mae Royal Palm Place - Kendall, Fl. 6,021,258 8.375% 4/1/06 39,000 5,563,531 5,563,531 ------------- ------------ (c) (d) ------------ $19,835,658 $ 18,779,477 $ 18,875,248 ============ ============= ============ (e) Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued C. PIMs, continued (a) Represents only the stated interest rate of the Fannie Mae MBS or the stated interest rate of the FHA mortgage loan less the servicing fee. In addition, the Partnership may receive participation income, consisting of (i) Minimum Additional Interest, (ii) Shared Income Interest and (iii) Shared Appreciation Interest. (b) On November 30, 1993, the Partnership entered into an agreement with the underlying borrower of the FHA PIM for a permanent interest rate reduction from 8.875% per annum to 7.375% per annum, retroactive to January 1, 1992. In exchange for the interest rate reduction, the Partnership received an increase in Shared Appreciation Interest from 25% in excess of the base amount of $15,410,000 to 25% of the net sales proceeds over the outstanding indebtedness at the time of sale. In the event of a refinancing, Shared Appreciation Interest is 25% of the appraised value over the outstanding indebtedness at the time of refinancing. In addition, Shared Income Interest increased from 25% of rental income in excess of the base amount of $175,000 to 25% of all distributable surplus cash. (c) The total original face amount of the PIM on the underlying property was $22,000,000 of which 73% or $15,978,742 was acquired by Krupp Insured Plus III Limited Partnership, an affiliate of the Partnership. (d) During December 1995, the Partnership agreed to a modification of the Royal Palm PIM. The Partnership received a reissued Fannie Mae MBS and increased its participation percentage in income and appreciation from 25% to 30%. The Partnership will receive interest only payments on the Fannie Mae MBS at interest rates ranging from 8.375% to 8.775% per annum through maturity. (e) The aggregate cost of PIMs for federal income tax purposes is $18,779,477. A reconciliation of the carrying value of Mortgages for each of the three years in the period ended December 31, 2001 is as follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of period $ 18,875,248 $ 19,032,999 $ 29,074,105 Deductions during period: Prepayment and principal collections (95,771) (157,751) (10,041,106) ------------- -------------- --------------- Balance at end of period $ 18,779,477 $ 18,875,248 $ 19,032,999 ============= ============== ============== The underlying mortgages of the PIMs are collateralized by multi-family apartment complexes located in two states. The apartment complexes range in size from 341 to 377 units. D. MBS --- The Partnership received a payoff of the Boulders Apartments MBS on July 9, 2001 for $9,045,042. The Partnership also received a prepayment premium of $306,000 from this payoff. On August 17, 2001, the Partnership paid a special distribution of $1.25 per Limited Partner interest from the proceeds received. The Partnership received a payoff from the Chateau Bijou MBS on September 19, 2000 for $2,266,064. During October, the Partnership received a 9% prepayment premium of $203,946 from this payoff. The Partnership paid a special distribution in November of $.33 per Limited Partner interest from the proceeds received. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued D. MBS, continued --- At December 31, 2001, the Partnership's MBS portfolio had an amortized cost of $8,912,032 and gross unrealized gains of $498,888. At December 31, 2000, the Partnership's MBS portfolio had an amortized cost of $9,458,992 and gross unrealized gains and losses of $338,073 and $1,482, respectively. At December 31, 2000, the Partnership's insured mortgage had an amortized cost of $9,068,897 and an unrealized gain of $351,420. The portfolio has maturities ranging from 2006 to 2032. Unrealized Maturity Date Fair Value Gain ------------- ------------- --------------- 2002 - 2006 $ 93,563 $ 7,082 2007 - 2011 317,739 22,746 2012 - 2032 8,999,618 469,060 ------------- --------------- ------------------ Total $ 9,410,920 $ 498,888 ============= =============== E. Partners' Equity Profits and losses from Partnership operations and Distributable Cash Flow are allocated 97% to the Unitholders and Corporate Limited Partner (the "Limited Partners") and 3% to the General Partners. Upon the occurrence of a capital transaction, as defined in the Partnership Agreement, net cash proceeds will be distributed first, to the Limited Partners until they have received a return of their total invested capital, second, to the General Partners until they have received a return of their total invested capital, third, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to any deficiency in the 10% cumulative return on their invested capital that exists through fiscal years prior to the date of the capital transaction, fourth, to the class of General Partners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and fifth, 96% to the Limited Partners and 4% to the General Partners. Upon the occurrence of a terminating capital transaction, as defined in the Partnership Agreement, the net cash proceeds and winding up of the affairs of the Partnership will be allocated among the Partners first, to each class of Partners in the amount equal to, or if less than, in proportion to, the positive balance in the Partner's capital accounts, second, to the Limited Partners until they have received a return of their total invested capital, third, to the General Partners until they have received a return of their total invested capital, fourth, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners have received to any deficiency in the 11% cumulative return on their invested capital that exists through fiscal years prior to the date of the capital transaction, fifth, to the General Partners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and sixth, 96% to the Limited Partners and 4% to the General Partners. Profits arising from a capital transaction will be allocated in the same manner as related cash distributions. Losses from a capital transaction will be allocated 97% to the Limited Partners and 3% to the General Partners. During 2001, 2000 and 1999, the Partnership made quarterly distributions totaling $.40, $.76 and $.76 per Limited Partner interest annually, respectively. The Partnership made special distributions of $1.25 and $1.63 per Limited Partner interest in 2001 and 2000, respectively. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued E. Partners' Equity, continued As of December 31, 2001, the following cumulative partner contributions and allocations have been made since inception of the Partnership: Corporate Accumulated Limited General Comprehensive Unitholders Partner Partners Income Total -------------- --------- ------------- ------------- ------------- Capital $ 149,489,830 $ 2,000 $ 3,000 $ - $ 149,494,830 contributions Syndication (7,906,604) - - - (7,906,604) costs Quarterly distributions (126,236,046) (1,727) (2,927,848) - (129,165,621) Special distributions (72,224,972) (963) - - (72,225,935) Net income 86,510,815 1,163 2,675,629 - 89,187,607 Unrealized gains on MBS - - - 498,888 498,888 -------------- ----------- ------------- ------------- --------------- Balance at December 31, 2001 $ 29,633,023 $ 473 $ (249,219) $ 498,888 $ 29,883,165 ============== =========== ============= ============= =============== F. Related Party Transactions Under the terms of the Partnership Agreement, the General Partners receive an Asset Management Fee equal to .75% per annum of the value of the Partnership's total invested assets payable quarterly. The General Partners may also receive an incentive management fee in an amount equal to .3% per annum on the Partnership's Total Invested Assets providing the Unitholders receive a specified non-cumulative annual return on their Invested Capital. Total fees payable to the General Partners for asset management and incentive management fees shall not exceed 10% of distributable cash flow over the life of the Partnership. Additionally, the Partnership reimburses affiliates of the General Partners for certain expenses incurred in connection with maintaining the books and records of the Partnership, the preparation and mailing of financial reports, tax information and other communications to investors and legal fees and expenses. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued G. Federal Income Taxes The reconciliation of the net income reported in the accompanying statement of income with the net income reported in the Partnership's 2001 federal income tax return is as follows: Net income from statement of operations $ 2,540,547 Add: Book to tax difference for amortization of prepaid fees and expenses 63,587 -------------- Net income for federal income tax purposes $ 2,604,134 ============== The allocation of the 2001 net income for federal income tax purposes is as follows: Portfolio Income Unitholders $ 2,535,156 Corporate Limited Partner 34 General Partners 68,944 ------------- $ 2,604,134 For the years ended December 31, 2001, 2000 and 1999 the average per unit net income to the Unitholders for federal income tax purposes was $.34, $.40 and $.40, respectively. The basis of the Partnership's assets for financial reporting purposes was less than its tax basis by approximately $256,000 and $343,000 at December 31, 2001 and 2000, respectively. The basis of the Partnership's liabilities for financial reporting purposes was less than its tax basis by approximately $11,000 at December 31, 2001. At December 31, 2000 the basis of the Partnership's liabilities for financial reporting purposes was the same as its tax basis. H. Fair Value Disclosures of Financial Instruments The Partnership used the following methods and assumptions to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of those instruments. MBS The Partnership estimated the fair value of MBS based on quoted market prices while it estimated the fair value of insured mortgages based on quoted prices of MBS with similar interest rates. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in MBS had gross unrealized gains of approximately $499,000 at December 31, 2001 and gross unrealized gains and losses of approximately $689,000 and $1,000 at December 31, 2000. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued H. Fair Value Disclosures of Financial Instruments, continued ----------------------------------------------- PIMs As there is no active trading market for these investments, management estimates the fair value of the PIMs using quoted market prices of MBS having a similar interest rate. Management does not include any estimate of participation interest in the Partnership's estimated fair value for the Vista Montana PIM, as Management does not believe it can predict the time of realization of the feature with any certainty. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in PIMs had gross unrealized gains of approximately $870,000 at December 31, 2001, and gross unrealized gains and losses of approximately $42,000 and $300,000 at December 31, 2000. At December 31, 2001 and 2000, the Partnership estimates the fair value of its financial instruments as follows (amounts rounded to the nearest thousand): 2001 2000 ----- ----- Fair Carrying Fair Carrying Value Value Value Value ---------- ---------- --------- --------- Cash and cash equivalents $ 1,423 $ 1,423 $ 1,461 $ 1,461 MBS and insured mortgage 9,411 9,411 19,216 18,864 PIMs 19,649 18,779 18,617 18,875 ---------- ---------- --------- --------- $ 30,483 $ 29,613 $ 39,294 $ 39,200 ========== ========== ========= ========= I. Subsequent Events The Partnership received a prepayment of the Royal Palm Place PIM. On January 2, 2002, the Partnership received $378,480 of Shared Appreciation Interest and $121,490 of Minimum Additional Interest. On February 27, 2002 the Partnership received $5,563,531 representing the principal proceeds on the first mortgage. The Partnership has declared a special distribution of $.80 per Limited Partner interest consisting of Shared Appreciation Interest and prepayment proceeds which will be paid in the first quarter of 2002. Unaudited Distributable Cash Flow and Net Cash Proceeds from Capital Transactions Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions, as defined by Section 17 of the Partnership Agreement, and the source of cash distributions for the year ended December 31, 2001 and the period from inception through December 31, 2001. 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, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Year Inception Ended Through 12/31/01 12/31/01 (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: - ----------------------- Income for tax purposes $ 2,605 $ 89,932 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid fees and expenses 28 7,728 Shared Appreciation Interest and prepayment premiums (306) (1,022) Amortization of MBS premiums - 453 Acquisition expenses paid from offering proceeds charged to operations - 1,098 Gain on sale of MBS - (114) --------- ---------- Total Distributable Cash Flow ("DCF") $ 2,327 $ 98,075 ========= ========== Limited Partners Share of DCF $ 2,257 $ 95,133 ========= ========== Limited Partners Share of DCF per Unit $ .30 $ 12.68(c) ========= ========== General Partners Share of DCF $ 70 $ 2,942 ========= ========== Net Proceeds from Capital Transactions: - -------------------------------------- Insurance claim proceeds, prepayment proceeds and PIM principal collections including Shared Appreciation Interest and prepayment premiums $ 96 $ 87,453 Principal collections on MBS including prepayment premiums 9,922 58,189 Insurance claim proceeds and principal collections on PIMs and MBS reinvested in PIMs and MBS - (40,775) Gain on sale of MBS - 114 --------- ---------- Total Net Proceeds from Capital Transactions $ 10,018 $ 104,981 ========= ========== Cash available for distribution (DCF plus Proceeds from Capital Transactions) $ 12,345 $ 203,056 ========= ========== Distributions: - ------------- Limited Partners $ 12,375(a) $ 199,214(b) ========= ========== Limited Partners Average per Unit $ 1.65(a) $ 26.56(b)(c) ========= ========== General Partners $ 70(a) $ 2,942(b) ========= ========== Total Distributions $ 12,445 $ 202,156 ========= ========== (a) Represents all distributions paid in 2001 except the February 2001 quarterly distribution and includes an estimate of the quarterly distribution to be paid in February 2002. (b) Includes an estimate of the quarterly distribution to be paid in February 2002. (c) Limited Partners average per Unit return of capital as of February 2002 is $13.88 [$26.56 - $12.68]. Return of capital represents that portion of distributions which is not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs.