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 10-11
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 - ------ Krupp Insured Mortgage Limited Partnership (the "Partnership") is a Massachusetts limited partnership which was formed on March 21, 1988. The Partnership raised approximately $299 million through a public offering of limited partner interests evidenced by units of depositary receipts ("Units"), and used the proceeds available for investment primarily to acquire participating insured mortgages ("PIMs") and mortgage-backed securities ("MBS"). The Partnership considers itself to be engaged only in the industry segment of investment in mortgages. The Partnership's investments in PIMs on multi-family residential properties consist of a MBS or an insured mortgage loan (collectively, the "insured mortgage") guaranteed or insured as to principal and basic interest. These insured mortgages were issued or originated under or in connection with the housing programs of the Government National Mortgage Association ("GNMA") or the Department of Housing and Urban Development ("HUD"). PIMs provide the Partnership with monthly payments of principal and basic interest and also may provide the Partnership with participation in the current revenue stream and in residual value, if any, from the sale or other realization of the underlying property (participation interest). The borrower conveys these rights to the Partnership through a subordinated promissory note and mortgage. The participation features are neither insured nor guaranteed. The Partnership also has investments in MBS collateralized by single-family and multi-family mortgage loans issued or originated by Fannie Mae, GNMA or the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae, GNMA and FHLMC guarantee the principal and basic interest of the Partnership's Fannie Mae, GNMA and FHLMC MBS, respectively. Proceeds received from prepayments or other realizations of mortgage assets will be distributed by the Partnership to investors through quarterly or special distributions. Although the Partnership will terminate no later than December 31, 2028, the value of the PIMs may be realized by the Partnership through repayment or sale as early as ten years from the dates of the closing of the permanent loans and the Partnership may realize the value of all its other investments within that time frame. Therefore, it is anticipated that dissolution of the Partnership could occur significantly prior to December 31, 2028. The Partnership's investments are not expected to be subject to seasonal fluctuations. However, the future performance of the Partnership will depend upon certain factors which cannot be predicted. In addition, any ultimate realization of the participation features of the PIMs will be 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 had an adverse effect on the Partnership's operations, and the Partnership does not presently anticipate any adverse effect 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 securities 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 12,400. 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. During 2000, the Partnership made special distributions consisting of principal proceeds, Shared Appreciation Interest and prepayment premiums from the Brookside, Enclave, Bell Station, Salishan, Saratoga, and Marina Shores PIM prepayments and the Patrician MBS prepayment. The Partnership will make special distributions in the future as PIMs prepay or if a sufficient amount of cash is available from MBS and PIM principal collections. The Partnership made distributions to its Partners during the two years ended December 31, 2001 and 2000 as follows: 2001 2000 ---------------------------- ------------------------------- Amount Per Unit Amount Per Unit --------------- ----------- ---------------- ------------- Quarterly Distributions: Limited Partners $ 3,589,632 $ .24 $ 5,833,146 $ .39 General Partners 78,831 - 142,320 - ------------- ------------- 3,668,463 5,975,466 Special Distributions: Limited Partners - $ - 53,994,033 $ 3.61 -------------- ------------- $ 3,668,463 $ 59,969,499 ============== ============= 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 Items 7 and 8 (Appendix A) of this report, respectively. Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total revenues $ 3,120,660 $ 4,690,857 $ 9,806,072 $ 11,954,179 $ 16,679,293 Net income 2,511,481 3,879,148 7,502,317 9,100,138 12,188,074 Net income allocated to Partners: Limited Partners 2,436,137 3,762,774 7,277,247 8,827,134 11,822,432 Average per Unit .16 .25 .49 .59 .79 General Partners 75,344 116,374 225,070 273,004 365,642 Total assets at December 31 41,946,276 42,790,650 98,726,491 135,213,294 161,358,290 Distributions to Partners: Quarterly Distributions: Limited Partners 3,589,632 5,833,146 12,563,709 13,909,819 17,948,156 Average per Unit .24 .39 .84 .93 1.20 General Partners 78,831 142,320 260,692 310,079 386,086 Special Distributions: Limited Partners - 53,994,033 30,511,863 20,789,946 28,717,048 Average Per Unit - 3.61 2.04 1.39 1.92 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; pre-payments 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 The most significant demand on the Partnership's liquidity is the regular quarterly distribution paid to investors of approximately $900,000. Funds used for the investor distributions are generated from interest income received on the PIMs, MBS, cash and short-term investments and the principal collections received on the PIMs and MBS. The Partnership funds a portion of the quarterly distribution from principal collections causing the capital resources of the Partnership to continually decrease. As a result of the decrease, the total cash inflows to the Partnership will also decrease, which 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 have determined that the Partnership will continue to pay a distribution of $.06 per Limited Partner interest per quarter for the near future. The General Partners have also determined that the Partnership will pay a special distribution of $.10 per Limited Partner interest in the first quarter of 2002 due to the prepayment of the single family MBS earlier than previously anticipated . In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investments also may provide additional income through its participation feature in the underlying properties if they operate successfully. The Partnership may receive a share in any operating cash flow that exceeds debt service obligations and capital needs or a share in any appreciation in value when the properties are sold or refinanced. However, this participation is neither guaranteed nor insured, and it is dependent upon whether property operations or its terminal value meet certain criteria. During May 2001, the Partnership received $19,231 from the borrowers of the Richmond Park PIM as a settlement to release the loan's participation features. The property was not generating sufficient cash flow to pay any participation from property operations nor did it have sufficient appreciation in value to meet the threshold to pay any participation based on value if the property was sold or refinanced. Considering the property's physical condition, there was little likelihood that its status would improve. Rental rate increases and occupancy levels had been difficult to achieve. Consequently, all of the cash flow generated by the property went back into operations. While the borrower had assured that the insured first mortgage debt was serviced, no major capital improvements were undertaken to enhance the property's leasing efforts. Furthermore, routine maintenance and repairs were beginning to be prioritized according to need and available cash. The condition of the property and its inability to generate sufficient cash flow seriously impaired the ability of the borrower to either sell the property or refinance it without taking a loss. The borrower's business plan was to make a significant investment in the property to correct deferred maintenance and functional obsolescence and to market it for leasing in order to reposition the property for a successful sale or refinance. The borrowers were unwilling to make the significant investments necessary while the property was encumbered with the PIM's participation features. As a result, the borrowers requested a release of the participation features while keeping the insured first mortgage in place until operations improve and the property can be sold or refinanced. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property's physical condition. Upon this settlement, the insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS as the only remaining portion of the investment is a GNMA MBS. The Partnership also reclassified this investment to available for sale concurrent with the release of the participation feature. The Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold. On June 2, 2000, the Partnership paid a special distribution of $.93 per Limited Partner interest from the Bell Station and Enclave PIM payoffs along with the Shared Appreciation Interest proceeds from the Brookside PIM (see below). On March 30, 2000, the Partnership received $190,239 of Shared Appreciation Interest and $5,973 of Shared Income Interest from the Bell Station PIM. During April, the Partnership received the principal proceeds of $4,901,863 from the Bell Station PIM. During May, the Partnership received the principal proceeds of $8,508,892 from the Enclave PIM. The underlying first mortgage loan matured on May 1, 2000; however, the Borrower was unable to close on his refinancing of the property in time to payoff the loan on its maturity date. Consequently, Fannie Mae paid off the MBS under its guarantee obligation. Subsequent to the payoff of the MBS portion of the PIM, the Partnership received $178,854 of Shared Appreciation Interest and $200,398 of Shared Income Interest. On March 30, 2000, the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds in the amount of $4,531,910, received from the Brookside Apartments PIM payoff in February of 2000. The underlying first mortgage loan matured on February 1, 2000; however, the Borrower was unable to close on his refinancing of the property in time to payoff the loan on its maturity date. Consequently, Fannie Mae paid off the MBS under its guarantee obligation. Subsequent to the payoff of the MBS portion of the PIM, the Partnership received $130,000 of Shared Appreciation Interest and $176,513 of Shared Income Interest. In addition to the payoffs mentioned above, the Partnership, received Shared Income Interest of $24,233 from the Enclave PIM during February 2000 and $34,793 from the Creekside PIM during June 2000. On January 11, 2000, the Partnership paid a special distribution of $2.37 per Limited Partner interest from the prepayment proceeds received during December 1999 from the Salishan, Saratoga and Marina Shores Apartments PIMs and the Patrician MBS. In addition to the principal proceeds from the Salishan PIM of $14,666,235, the Partnership received $146,662 of prepayment premium income and $311,650 of Shared Income Interest and Minimum Additional Interest. The Partnership received $6,008,565 of principal proceeds from the Marina Shores PIM along with $176,679 of Shared Appreciation Interest and prepayment premium income. The principal proceeds from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did not receive any participation interest on the Saratoga prepayment. In October 1999, the Partnership received a repayment of the Valley Manor Apartments PIM of $4,425,993. The Partnership did not receive any Additional Interest as a result of this prepayment because the underlying property's appraised value did not exceed the threshold required to realize additional interest. In November 1999 the Partnership paid a special distribution of $.30 per Limited Partner interest from the Valley Manor proceeds. In February 1999, the Partnership received a payoff of the Pope Building PIM in the amount of $3,176,761. In addition, the Partnership received $703,860 of Shared Appreciation and prepayment premium income and $218,578 of Shared Income and Minimum Additional Interest upon the payoff of the underlying mortgage. During March 1999, the Partnership received a payoff of the Remington PIM in the amount of $12,199,298. The payoff was the result of a default on the underlying loan which resulted in the Partnership receiving all of the outstanding principal balance under the insurance feature of the PIM. However, due to the default the Partnership did not receive any participation income from this PIM. During May 1999, the Partnership paid a special distribution of $1.08 per Limited Partner interest from the principal proceeds received from the Remington and Pope Building PIMs and the Shared Appreciation and prepayment premium proceeds received from the Pope Building PIM. During January 1999, the Partnership paid a special distribution of $.66 per Limited Partner Interest from the principal proceeds and prepayment premium received from the Cross Creek PIM in 1998. The prepayment of the Cross Creek PIM remaining principal balance amounted to $9,414,586 with Additional Income (in lieu of a prepayment premium) of approximately $318,000 was received along with Shared Income of approximately $60,000. The Partnership agreed to provide debt service relief in December of 2000 for the Wildflower PIM due to the property's poor operating performance in the competitive Las Vegas market. Occupancy had fallen as low as 80%, and the property had been unable to generate sufficient revenues to adequately maintain the property. Consequently, a loan modification agreement between the Partnership, the borrower entity under the PIM, the principals of the borrower entity and the affiliated property management agent will provide operating funds for property repairs. Under the modification, the principals of the borrower entity converted $105,000 of cash advances to a long-term non-interest-bearing loan. In addition, an escrow account to be used exclusively for property repairs was established and is under the control of the Partnership. The management agent made an initial deposit into the escrow equal to 30% of the management fees it received during 2000 and will continue to deposit a similar amount until December 2002. The Partnership made an initial deposit into the escrow account to match the $105,000 principals' loan and the management agent's initial deposit and will continue to match additional deposits until December 2002. The Partnership's contributions to the escrow account will be considered an interest rebate. The principals' loan and the escrow deposits made by the management agent and the Partnership can be repaid exclusively out of any Surplus Cash, as defined by HUD, that the property may generate in future years. Any repayments will be made on a pro rata basis among the parties. The Partnership's other remaining PIM investment is backed by the underlying first mortgage loan on Creekside. Presently, the General Partners do not expect Creekside 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. Creekside, located in the Portland, Oregon area, continues to operate successfully with occupancy in the mid-90% range. However, Clackamas County is undertaking an extensive road improvement project adjacent to Creekside, and a portion of the property may be taken during the road's construction. The Partnership does not expect any major changes to the property during 2002, but eventually, property operations could be affected by the road project. The Partnership has the option to call these PIMs by accelerating their maturity if they are not prepaid by the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Such factors as the condition of the asset, local market conditions, the interest rate environment and availability of financing will affect those decisions. 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 based on the stated rate of the FHA mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA 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 represent interests 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 $3.4 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization. Interest Rate Risk The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 2001, the Partnerships PIMs and MBS comprise the majority of the Partnership's assets. Decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold all of its investments to expected maturity. The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, when setting regular distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they mature. The table below provides information about the Partnership's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates ("WAIR") by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments. Expected maturity dates ($ in thousands) 2002 2003 2004 2005 2006 Thereafter Total Fair Face Value Value Interest-sensitive assets: MBS $ 917 $ 817 $ 734 $ 666 $ 611 $ 10,111 $ 13,856 $ 14,308 WAIR 7.63% 7.63% 7.63 % 7.63% 7.63% 7.63% 7.63% PIMs 309 335 363 393 426 21,898 23,724 24,767 WAIR 7.94% 7.94% 7.94% 7.94% 7.94% 7.94% 7.94% -------- -------- -------- -------- ------- ------------ ------------ ------------ Total Interest- sensitive assets $ 1,226 $ 1,152 $ 1,097 $ 1,059 $ 1,037 $ 32,009 $ 37,580 $ 39,075 ======== ======== ======== ======== ======= ============ ============ ============ 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 $ 2,069 $ 2,773 $ 6,325 Participation interest 19 941 1,666 Interest income on MBS 902 550 1,206 Other interest income 130 427 609 Partnership expenses (536) (674) (1,006) Amortization of prepaid fees and expenses (73) (138) (1,298) -------- ---------- --------- Net income $ 2,511 $ 3,879 $ 7,502 ======== ========== ========= Net income decreased in 2001 when compared to 2000 primarily due to lower basic interest and participation interest on PIMs and other interest income. This was partially offset by an increase in MBS interest income and decreases in general and administrative expenses, asset management fees and amortization expense. Basic interest on PIMs decreased primarily due to the payoffs of the Enclave, Bell Station and Brookside PIMs in 2000 and the reclassification of the Richmond Park PIM to a MBS in May 2001. Participation interest was higher during 2000 due to amounts collected in connection with the PIM payoffs received. Other interest income decreased due to significantly lower average interest rates earned on cash balances available for short-term investing in 2001 versus 2000. MBS interest income increased due to the Richmond Park reclassification. General and administrative expenses were greater during 2000 due to higher processing costs. The decrease in asset management fees is a result of the Partnership's asset base declining from the PIM prepayments. Amortization expense was greater during 2000 as compared to 2001 as a result of the full amortization of the remaining prepaid fees and expenses on the PIM prepayments in 2000. Net income decreased in 2000 as compared to 1999 due primarily to lower interest income on PIMs and MBS. Basic interest on PIMs decreased due to the payoffs of the Enclave, Bell Station and Brookside PIMs in 2000 and the Salishan, Saratoga, Marina Shores and Valley Shores PIMs in 1999. Participation interest decreased due to the PIM payoffs mentioned above. MBS interest income decreased due primarily to the payoff of the Patrician MBS in 1999. Expenses decreased in 2000 compared with 1999 due primarily to lower asset management fees and amortization expenses. The decrease in asset management fees is a result of the Partnership's asset base declining. Amortization expense was greater in 1999 as compared to 2000 as a result of the full amortization of the remaining prepaid fees and expenses on the 1999 PIM prepayments being greater than the 2000 PIM prepayments. 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 Krupp Plus Corporation which is a General Partner of the Partnership and is the general partner of Mortgage Services Partners Limited Partnership which is the other General Partner of the Partnership, is as follows: Position with Name and Age Krupp Plus Corporation Douglas Krupp (55) President, Co-Chairman of the Board and Director George Krupp (57) Co-Chairman of the Board and Director Peter F. Donovan (48) Senior Vice President Ronald Halpern (60) Senior Vice President Robert A. Barrows (44) Vice President and Treasurer Carol J.C. Mills (52) Vice President 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. Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance which position he has held since January of 1998 and in this capacity, he oversees the strategic growth plans of this mortgage banking firm. Berkshire Mortgage Finance is the 10th largest commercial mortgage servicer in the United States with a servicing and asset management portfolio of $14.1 billion. Previously he served as President of Berkshire Mortgage Finance from January of 1993 to January of 1998 and in that capacity he directed the production, underwriting, servicing and asset management activities of the firm. Prior to that, he was Senior Vice President of Berkshire Mortgage Finance and was responsible for all participating mortgage originations. Before joining the firm in 1984, he was Second Vice President, Real Estate Finance for Continental Illinois National Bank and Trust, where he managed a $300 million construction loan portfolio of commercial properties. Mr. Donovan received a B.A. from Trinity College and an M.B.A. degree from Northwestern University. Mr. Donovan is currently a member of the Advisory Council for Fannie Mae. Ronald Halpern is President and COO of Berkshire Mortgage Finance. He has served in these positions since January of 1998 and in this capacity, he is responsible for the overall operations of the Company. Prior to January of 1998, he was Executive Vice President, managing the underwriting, closing, portfolio management and servicing departments for Berkshire Mortgage Finance. Before joining the firm in 1987, he held senior management positions with the Department of Housing and Urban Development in Washington D.C. and several HUD regional offices. Mr. Halpern has over 30 years of experience in real estate finance which includes his experience as prior Chairman of the MBA Multifamily Housing Committee. He holds a B.A. degree from the University of the City of New York and J.D. degree from Brooklyn Law School. 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. Carol J.C. Mills is Senior Vice President for Loan Management of Berkshire Mortgage Finance and in this capacity, she is responsible for the Loan Servicing and Asset Management functions of Berkshire Mortgage Finance. She manages the estimated $14.1 billion portfolio of loans. Ms. Mills joined Berkshire in December 1997 as Vice President and was promoted to Senior Vice President in January 1999. From January 1989 through November 1997, Ms. Mills was Vice President of First Winthrop Corporation and Winthrop Financial Associates, in Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke College and a Master of Architecture degree from Harvard University. Ms. Mills is a member of the Real Estate Finance Association, New England Women in Real Estate, the Mortgage Bankers Association and the Servicing Advisory Council for Freddie Mac. 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 of record owned or was known by the General Partners to own beneficially more than 5% of the Partnership's 14,956,796 outstanding Limited Partner interests. 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 SCHEDULES 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) Agreement of Limited Partnership dated as of July 19, 1988 [Exhibit A included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 20, 1988 (File No. 33-21201)].* (4.2) Subscription Agreement whereby a subscriber agrees to purchase Units and adopts the provisions of the Agreement of Limited Partnership [Exhibit D included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 20, 1988 (File No. 33-21201)].* (4.3) Copy of First Amended and Restated Certificate of Limited Partnership filed with the Massachusetts Secretary of State on July 1, 1988. [Exhibit 4.4 to Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 20, 1988 (File No. 33-21201)].* (10) Material Contracts: ------------------ (10.1) Form of agreement between the Partnership and Krupp Mortgage Corporation [Exhibit 10.2 to Registrant's Registration Statement on Form S-11 dated April 20, 1988 (File No. 33-21201)].* Richmond Park Apartments (10.2) Prospectus for GNMA Pool No. 260865 (PL) [Exhibit 1 to Registrant's report on Form 8-K dated August 30, 1989 (File No. 0-17690)].* Wildflower Apartments (10.3) Prospectus for GNMA Pool No. 280652(PL) [Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17690)].* (10.4) Subordinated Multifamily Deed of Trust dated December 12, 1989 (including Subordinated Promissory Note) between Lincoln Wildflower Limited Partnership and Krupp Insured Mortgage Limited Partnership [Exhibit 10.31 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17690)].* (10.5) Loan Modification Agreement, dated December 21, 2000, between Krupp Insured Mortgage Limited Partnership, Berkshire Mortgage Finance Corporation (formally known as Krupp Mortgage Corporation), Legacy Wildflower Limited Partnership (formally known as Lincoln Wildflower Limited Partnership), Legacy Partners 326 Limited Partnership (formally known as Lincoln Property Company #326 Limited) and Legacy Partners Residential, Inc.* Creekside Apartments (10.6) Subordinated Promissory Note dated June 28, 1990 between Creekside Associates Limited Partnership and Krupp Insured Mortgage Limited Partnership [Exhibit 19.6 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].* (10.7) Subordinated Multifamily Deed of Trust dated June 28, 1990 between Creekside Associates Limited Partnership and Krupp Insured Mortgage Limited Partnership [Exhibit 19.7 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].* (10.8) Participation Agreement dated June 28, 1990 between Krupp Mortgage Corporation and Krupp Insured Mortgage Limited Partnership [Exhibit 19.1 to Registrant's report on Form 10-Q for the quarter ended September 30, 1990 (File No. 0-17690)].* * 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 MORTGAGE LIMITED PARTNERSHIP By: Krupp Plus Corporation, a General Partner By: /s/ Douglas Krupp -------------------------------------------------------- Douglas Krupp, President, Co-Chairman (Principal Executive Officer), and Director of Krupp Plus 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 President, Co-Chairman (Principal Executive - ---------------------------- Douglas Krupp Officer), and Director of Krupp Plus Corporation, a General Partner /s/ George Krupp Co-Chairman (Principal Executive Officer) - ---------------------------- George Krupp and Director of Krupp Plus Corporation, a General Partner /s/ Peter F. Donovan Senior Vice President of Krupp Plus - ---------------------------- Peter F. Donovan Corporation, a General Partner /s/ Robert A. Barrows Vice President and Treasurer of Krupp Plus - ---------------------------- Robert A. Barrows Corporation, a General Partner APPENDIX A KRUPP INSURED MORTGAGE 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 MORTGAGE 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-17 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 Mortgage 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 Mortgage 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 MORTGAGE LIMITED PARTNERSHIP BALANCE SHEETS December 31, 2001 and 2000 ASSETS 2001 2000 ---- ---- Participating Insured Mortgages ("PIMs") (Notes B, C and H) $ 23,723,593 $ 33,004,074 Mortgage-Backed Securities ("MBS") (Notes B, D and H) 14,308,403 6,640,398 ------------ ------------- Total mortgage investments 38,031,996 39,644,472 Cash and cash equivalents (Notes B, C and H) 3,603,846 2,737,740 Interest receivable and other assets 267,672 292,370 Prepaid acquisition fees and expenses, net of accumulated amortization of $596,986 and $544,434 respectively (Note B) 30,656 83,208 Prepaid participation servicing fees, net of accumulated amortization of $195,430 and $174,676, respectively (Note B) 12,106 32,860 ------------- ------------- Total assets $ 41,946,276 $ 42,790,650 ============= ============= LIABILITIES AND PARTNERS' EQUITY Liabilities $ 17,875 $ 17,650 ------------- ------------- Partners' equity (deficit) (Notes A and E): Limited Partners 41,833,148 42,986,643 (14,956,796 Limited Partner interests outstanding) General Partners (377,115) (373,628) Accumulated Comprehensive Income (Note B) 472,368 159,985 ------------- ------------- Total Partners' equity 41,928,401 42,773,000 ------------- ------------- Total liabilities and Partners' equity $ 41,946,276 $ 42,790,650 ============= ============= The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ------------- ------------- ------------- Revenues (Note B): Interest income - PIMs (Note C): Basic interest $ 2,068,652 $ 2,772,996 $ 6,324,994 Participation interest 19,231 941,003 1,665,793 Interest income - MBS (Note D) 902,292 549,802 1,205,925 Other interest income 130,485 427,056 609,360 ------------- ------------- ------------- Total revenues 3,120,660 4,690,857 9,806,072 ------------- ------------- ------------- Expenses: Asset management fee to an affiliate (Note F) 231,416 318,118 703,699 Expense reimbursements to affiliates (Note F) 118,398 125,247 92,642 Amortization of prepaid fees and expenses (Note B) 73,306 138,050 1,298,012 General and administrative 186,059 230,294 209,402 ------------- ------------- ------------- Total expenses 609,179 811,709 2,303,755 ------------- ------------- ------------- Net income (Note G) 2,511,481 3,879,148 7,502,317 Other comprehensive income: Net change in unrealized gain on MBS 312,383 156,410 (641,612) ------------- ------------- ------------- Total comprehensive income $ 2,823,864 $ 4,035,558 $ 6,860,705 ============= ============= ============= Allocation of net income (Note E): Limited Partners $ 2,436,137 $ 3,762,774 $ 7,277,247 ============= ============= ============= Average net income per Limited Partner interest (14,956,796 Limited Partner interests outstanding) $ .16 $ .25 $ .49 ============= ============= ============= General Partners $ 75,344 $ 116,374 $ 225,070 ============= ============= ============= The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE 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 $ 134,849,373 $ (312,060) $ 645,187 $ 135,182,500 Net income 7,277,247 225,070 - 7,502,317 Quarterly distributions (12,563,709) (260,692) - (12,824,401) Special distributions (30,511,863) - - (30,511,863) Change in unrealized gain on MBS - - (641,612) (641,612) -------------- ----------- ---------- ------------ Balance at December 31, 1999 99,051,048 (347,682) 3,575 98,706,941 Net income 3,762,774 116,374 - 3,879,148 Quarterly distributions (5,833,146) (142,320) - (5,975,466) Special distributions (53,994,033) - - (53,994,033) Change in unrealized gain on MBS - - 156,410 156,410 -------------- ----------- ---------- ------------ Balance at December 31, 2000 42,986,643 (373,628) 159,985 42,773,000 Net income 2,436,137 75,344 - 2,511,481 Quarterly distributions (3,589,632) (78,831) - (3,668,463) Change in unrealized gain on MBS - - 312,383 312,383 -------------- ----------- ----------- ------------- Balance at December 31, 2001 $ 41,833,148 $ (377,115) $ 472,368 $ 41,928,401 ============== =========== =========== ============= The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ---- ---- ---- Operating activities: Net income $ 2,511,481 $ 3,879,148 $ 7,502,317 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 73,306 138,050 1,298,012 Shared Appreciation Interest and prepayment premium income - (499,093) (1,027,201) Changes in assets and liabilities: Decrease (increase) in interest receivable and other assets 24,698 (105,007) 598,802 Increase (decrease) in liabilities 225 (1,900) (11,244) ------------- ------------- ------------- - Net cash provided by operating activities 2,609,710 3,411,198 8,360,686 ------------- ------------- -------------- Investing activities: Principal collections on PIMs including Shared Appreciation Interest and prepayment premiums of $499,093 in 2000, and $1,027,201 in 1999 330,141 18,885,111 48,587,772 Principal collections on MBS 1,594,718 976,124 10,705,146 ------------ ------------- -------------- Net cash provided by investing activities 1,924,859 19,861,235 59,292,918 ------------- ------------- ------------- - Financing activities: Quarterly distributions (3,668,463) (5,975,466) (12,824,401) Special distributions - (53,994,033) (30,511,863) ------------- ------------- ------------- - Net cash used for financing activities (3,668,463) (59,969,499) (43,336,264) ------------- ------------- ------------- - Net increase (decrease) in cash and cash equivalents 866,106 (36,697,066) 24,317,340 Cash and cash equivalents, beginning of year 2,737,740 39,434,806 15,117,466 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 3,603,846 $ 2,737,740 $ 39,434,806 ============= ============= ============= Supplemental disclosure of non-cash investing activities: Reclassification of investment in a PIM to a MBS $ 8,950,340 $ - $ - ============= ============= ============= Non cash activities: Increase (decrease) in fair value of MBS $ 312,383 $ 156,410 $ (641,612) ============= ============= ============= The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS A. Organization Krupp Insured Mortgage Limited Partnership (the "Partnership") was formed on March 21, 1988 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. The Partnership was organized for the purpose of investing in multi-family loans and mortgage backed securities. The Partnership issued all of the General Partner Interests to two General Partners in exchange for capital contributions aggregating $3,000. Krupp Plus Corporation and Mortgage Services Partners Limited Partnership are the General Partners of the Partnership and Krupp Depositary Corporation is the Corporate Limited Partner. Except under certain limited circumstances upon termination of the Partnership, the General Partners are not required to make any additional capital contributions. The Partnership terminates on December 31, 2028, unless terminated earlier upon the occurrence of certain events as set forth in the Partnership Agreement. The Partnership commenced the public offering of Limited Partner interests on July 22, 1988 and completed its public offering on May 23, 1990 having sold 14,956,696 Limited Partner interests for $298,678,321 net of purchase volume discounts of $457,599. In addition, Krupp Depositary Corporation owns one hundred Limited Partner interests. B. Significant Accounting Policies The Partnership uses the following accounting policies for financial reporting purposes, which may 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 Government National Mortgage Association (GNMA) MBS at amortized cost. The insured mortgage portion of its Federal Housing Administration (FHA) PIM is carried at amortized cost. The Partnership holds this FHA insured mortgage at amortized cost since the loan is fully insured by the FHA. Basic interest on PIMs is recognized based on the stated rate of the FHA mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA 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. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued B. Significant Accounting Policies, continued 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. 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 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. Acquisition expenses incurred on potential acquisitions which were not consummated were charged to operations. The Partnership amortizes prepaid participation servicing fees using a method that approximates the effective interest method over a ten-year period beginning at final endorsement of the loan if a Department of Housing and Urban Development ("HUD") loan or GNMA 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 as Partnership income is allocated to the partners for income tax purposes. In the event that the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and the 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 and three PIMs, respectively. The Partnership's PIMs consist of (a) a GNMA MBS representing the securitized first mortgage loan on the underlying property or a sole participation interest in the mortgage loan originated under HUD's FHA lending program (collectively the "insured mortgages"), and (b) participation interests in the revenue stream and appreciation of the underlying property above specified base levels. The borrower conveys these participation features to the Partnership generally through a subordinated promissory note and mortgage (the "Agreement"). Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued C. PIMs, continued The Partnership receives guaranteed monthly payments of principal and interest on the GNMA MBS, and HUD insures the FHA mortgage loan. The borrower usually cannot prepay the first mortgage loan during the first five years and may prepay the first mortgage loan thereafter subject to a 9% prepayment premium in years six through nine, a 1% prepayment premium in year ten and no prepayment premium thereafter. The Partnership may receive interest 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% to 1% per annum calculated on the unpaid principal balance of the first mortgage on the underlying property, (ii) "Shared Income Interest" which is 25% to 35% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent that it exceeds the amount of Minimum Additional Interest earned during such month and (iii) "Shared Appreciation Interest" which is 25% to 35% of any increase in the value of the underlying property in excess of a specified base. Payment of participation interest from the operations of the property is limited in any year 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 above certain thresholds. 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 Partnership, upon giving twelve months written notice, 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. During May 2001, the Partnership received $19,231 from the borrowers of the Richmond Park PIM as a settlement to release the loan's participation features. The property never generated sufficient cash flow to pay any participation from property operations nor did it have sufficient value to meet the threshold to pay any participation based on value if the property was sold or refinanced. The borrowers asked for a release of the participation features while keeping the insured first mortgage in place until operations improve and the property can be sold or refinanced. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property's current condition. Upon this settlement, the insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS as the only remaining portion of the investment is a GNMA MBS. The Partnership also reclassified this investment to available for sale concurrent with the release of the participation feature. The Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued C. PIMs, continued On June 2, 2000, the Partnership paid a special distribution of $.93 per Limited Partner interest from the proceeds of the Bell Station and Enclave insured mortgage payoffs along with the Shared Appreciation Interest proceeds from the Brookside PIM (see below), the Bell Station PIM and the Enclave PIM. On March 30, 2000, the Partnership received $190,239 of Shared Appreciation Interest and $5,973 of Shared Income Interest from the Bell Station PIM. During April and May, the Partnership received the principal proceeds of $4,901,863 and $8,508,892 from the Bell Station and the Enclave PIM, respectively. Subsequent to the payoff of the MBS portion of the Enclave PIM, the Partnership received $178,854 of Shared Appreciation Interest and $200,398 of Shared Income Interest. On March 30, 2000, the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds in the amount of $4,531,910, received from the Brookside Apartments PIM payoff in February of 2000. Subsequent to the payoff of the MBS portion of the Brookside PIM, the Partnership received $130,000 of Shared Appreciation Interest and $176,513 of Shared Income Interest. On January 11, 2000, the Partnership paid a special distribution of $2.37 per Limited Partner interest from the prepayment proceeds received during December 1999 from the Salishan, Saratoga, and Marina Shores Apartments PIMs and the Patrician MBS. In addition to the principal proceeds from the Salishan PIM of $14,666,235, the Partnership received $146,662 of prepayment premium income and $311,650 of Shared Income Interest and Minimum Additional Interest. The Partnership also received $6,008,565 of principal proceeds from the Marina Shores PIM along with $176,679 of Shared Appreciation Interest and prepayment premium income. The principal proceeds from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did not receive any participation interest on the Saratoga prepayment. During November 1999, the Partnership paid a special distribution of $.30 per Limited Partner interest from the principal proceeds received from the Valley Manor PIM of $4,425,993. The Partnership did not receive any participation income from this PIM prepayment. During May 1999, the Partnership paid a special distribution of $1.08 per Limited Partner interest from the principal proceeds, Shared Appreciation and prepayment proceeds received from the Remington and Pope Building PIMs (see below). During March 1999, the Partnership received a payoff of the Remington PIM in the amount of $12,199,298. The payoff was the result of a default on the underlying loan which resulted in the Partnership receiving all of the outstanding principal balance under the insurance feature of the PIM. However, due to the default the Partnership did not receive any participation income from this PIM. During February 1999, the Partnership received a payoff of the Pope Building PIM in the amount of $3,176,761. In addition, the Partnership received $703,860 of Shared Appreciation Interest and prepayment premium income and $218,578 of Shared Income Interest and Minimum Additional Interest upon the payoff of the underlying mortgage. During January 1999, the Partnership paid a special distribution of $.66 per Limited Partner interest from the principal proceeds and prepayment premium received from the Cross Creek PIM during 1998. On November 16, 1998, the Partnership received a prepayment of the Cross Creek PIM in the amount of $9,414,586. Additional interest in lieu of a prepayment penalty of approximately $318,000 along with Shared Income Interest of approximately $60,000 was also received during 1998. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued C. PIMs, continued 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 consisted of the following at December 31, 2001 and 2000: Approximate Original Monthly Investment Basis at Face Interest Maturity Payment December 31, PIMs Amount Rate (a) Date (f) (g) 2001 2000 - ---- ------ -------- -------- ------------- ------------ ------------- GNMA Richmond Park Apts. (h) Richmond Heights, $ 10,000,000 - - $ - $ - $ 8,995,263 OH Wildflower Apts. Las Vegas, NV 17,600,000 7.75% 1/15/25 121,700 15,774,526 16,002,630 ------------- ------------ ------------- (b) (e) (i) 27,600,000 15,774,526 24,997,893 ------------- ------------ ------------- FHA - --- Creekside Apts. Portland, OR 8,354,500 8.305% 11/1/31 60,000 7,949,067 8,006,181 ------------- ------------ ------------- (b) (c) (d) Total $ 35,954,500 $ 23,723,593 $ 33,004,074 ============= ============ ============= (j) (a) Represents the permanent interest rate of the GNMA MBS or the HUD-insured first mortgage less the servicers fee. The Partnership may also receive additional interest which consists of (i) Minimum Additional Interest based on a percentage of the unpaid principal balance of the first mortgage on the property, (ii) Shared Income Interest based on a percentage of monthly gross income generated by the underlying property in excess of a specified base amount (but only to the extent it exceeds the amount of Minimum Additional Interest received during such month), (iii) Shared Appreciation Interest based on a percentage of any increase in the value of the underlying property in excess of a specified base value. (b) Minimum additional interest is at a rate of .5% per annum calculated on the unpaid principal balance of the first mortgage note. (c) Shared income interest is based on 25% of monthly gross rental income over a specified base amount. (d) Shared appreciation interest is based on 25% of any increase in the value of the project over the specified base value. (e) Shared income interest is based on 35% of monthly gross rental income over a specified base amount and shared appreciation interest is based on 35% of any increase in the value of the project over the specified base value. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued C. PIMs, continued (f) The Partnership's GNMA MBS and HUD direct mortgages have call provisions, which allow the Partnership to accelerate their respective maturity dates. (g) The normal monthly payment consisting of principal and interest is payable monthly at level amounts over the term of the GNMA MBS and the HUD direct mortgage. (h) During May 2001, the Partnership received $19,231 as a settlement to release the loan's participation features. The insured first mortgage loan was reclassified from a PIM to a MBS. (i) The coupon rate of interest on the Wildflower Apartments PIM is 7.75% per annum. However, in December 2000 the Partnership agreed to provide debt service relief for the Wildflower PIM due to the property's poor operating performance in the competitive Las Vegas market. Occupancy has fallen as low as 80%, and the property has been unable to generate sufficient revenues to adequately maintain the property. Consequently, a loan modification agreement between the Partnership, the borrower entity under the PIM, the principals of the borrower entity, and the affiliated property management agent will provide operating funds for property repairs. Under the modification, the principals of the borrower entity converted $105,000 of cash advances to a long-term non interest-bearing loan. In addition, an escrow account to be used exclusively for property repairs has been established and is under the control of the Partnership. The management agent made an initial deposit into the escrow equal to 30% of the management fees it received during 2000 and will continue to deposit a similar amount until December 2002. The Partnership made an initial deposit into the escrow to match the $105,000 principals' loan and the management agent's initial deposit and will continue to match additional deposits until December 2002. The Partnership's contributions to the escrow account will be considered to be an interest rebate. The principals' loan and the escrow deposits made by the management agent and the Partnership can be repaid exclusively out of any Surplus Cash, as defined by HUD, that the property may generate in future years. Any repayments will be made on a pro rata basis amongst the parties. The approximate monthly payment is before the rebate which fluctuates month to month. (j) The aggregate cost of PIMs for federal income tax purposes is $23,723,593. A reconciliation of the carrying value of PIMs for each of the three years in the period ended December 31, 2001 is as follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of period $ 33,004,074 $ 51,390,092 $ 98,950,663 Deductions during period: Prepayments and principal collections (330,141) (18,386,018) (47,560,571) Reclass to MBS (8,950,340) - - -------------- ------------- -------------- Balance at end of period $ 23,723,593 $ 33,004,074 $ 51,390,092 ============== ============= ============== The underlying mortgages of the PIMs are collateralized by multi-family apartment complexes located in 2 states. The apartment complexes range in size from 172 to 540 units. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued D. MBS --- At December 31, 2001, the Partnership's MBS portfolio had an amortized cost of $13,836,035 and gross unrealized gains of $472,368. At December 31, 2000, the Partnership's MBS portfolio had an amortized cost of $6,480,413 and gross unrealized gains and losses of $160,571 and $586 respectively. The portfolio has maturity dates ranging from 2016 to 2024. Unrealized Maturity Date Fair Value Gain/(Loss) ------------- ------------- -------------- 2002 - 2006 $ - $ - 2007 - 2011 - - 2012 - 2024 14,308,403 472,368 ------------- -------------- Total $ 14,308,403 $ 472,368 ============= ============== E. Partners' Equity Profits 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 and profits from the capital transaction 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 11% 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. Losses from a capital transaction will be allocated 97% to the Limited Partners and 3% 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. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued E. Partners' Equity, continued During 2001, 2000 and 1999 the Partnership made quarterly distributions totaling $.24, $.39 and $.84 per Limited Partner interest, respectively. The Partnership made special distributions of $3.61 and $2.04 per Limited interest in 2000 and 1999, respectively. 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 contributions $ 298,678,321 $ 2,000 $ 3,000 $ - $ 298,683,321 Syndication costs (20,431,915) - - - (20,431,915) Quarterly distributions (224,056,957) (1,612) (4,929,066) - (228,987,635) Special distributions (159,438,377) (1,066) - - (159,439,443) Net income 147,081,731 1,023 4,548,951 - 151,631,705 Unrealized gains on MBS - - - 472,368 472,368 ----------- ---------- ----------- ---------- -------------- Balance, December 31, 2001 $41,832,803 $ 345 $ (377,115) $ 472,368 $ 41,928,401 =========== ========== =========== ========== ============== F. Related Party Transactions Under the terms of the Partnership Agreement, the General Partners or their affiliates receive an Asset Management Fee equal to .75% per annum of the value of the Partnership's 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 as asset management or incentive management fees shall not exceed 9.05% 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, other communications to investors and legal fees and expenses. Continued KRUPP INSURED MORTGAGE 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 income reported in the Partnership's 2001 federal income tax return is as follows: Net income per statement of income $ 2,511,481 Less: Book to tax difference for amortization of prepaid fees and expenses (180,622) ------------ Net income for federal income tax purposes $ 2,330,859 ============ The allocation of the 2001 net income for federal income tax purposes is as follows: Portfolio Income ------------ Unitholders $ 2,260,918 Corporate Limited Partner 15 General Partners 69,926 ------------- $ 2,330,859 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 $.15, $.25 and $.36 respectively. The basis of the Partnership's assets for financial reporting purposes was less than its tax basis by approximately $1,698,000 and $2,191,000 at December 31, 2001 and 2000, respectively. The basis of the Partnership's liabilities for financial reporting purposes were the same as its tax basis at December 31, 2001 and 2000, respectively. H. Fair Value Disclosure of Financial Instruments The Partnership uses 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 due to the short maturity of those instruments. MBS The Partnership estimates the fair value of MBS based on quoted market prices. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in MBS had gross unrealized gains of approximately $472,000 at December 31, 2001, and gross unrealized gains and losses of approximately $161,000 and $1,000 at December 31, 2000. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued H. Fair Value Disclosure 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 the same stated coupon rate. Management does not include any participation income in the Partnership's estimated fair value arising from appreciation of the properties, 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 $1,043,000 at December 31, 2001, and gross unrealized gains and losses of approximately $98,000 and $216,000 at December 31, 2000. At December 31, 2001 and 2000, the estimated fair values of the Partnership's financial instruments are as follows (amounts rounded to nearest thousand): 2001 2000 ---- ---- Fair Carrying Fair Carrying Value Value Value Value ---------- ---------- ---------- --------- Cash and cash equivalents $ 3,604 $ 3,604 $ 2,738 $ 2,738 MBS 14,308 14,308 6,640 6,640 PIMS 24,767 23,724 32,886 33,004 --------- --------- -------- --------- $ 42,679 $ 41,636 $ 42,264 $ 42,382 ========= ========= ======== ========= 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 in 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 $ 2,331 $ 153,805 Items not requiring or (not providing) the use of operating funds: Shared Appreciation income - (5,716) Amortization of prepaid fees and expenses 254 17,094 Interest rate reduction collectible in the future - - Acquisition expenses paid from offering proceeds charged to operations - 184 Gain on sale of MBS - (417) --------- ----------- Total Distributable Cash Flow ("DCF") $ 2,585 $ 164,950 ========= =========== Limited Partners Share of DCF $ 2,507 $ 160,001 ========= =========== Limited Partners Share of DCF per Unit (14,956,796) $ .17 $ 10.70(c) ========= =========== General Partners Share of DCF $ 78 $ 4,949 ========= =========== Net Proceeds from Capital Transactions: - -------------------------------------- Prepayments and principal collections on PIMs including shared appreciation income $ 330 $ 161,386 Principal collections on MBS 1,595 80,247 Principal collections on MBS and PIMs reinvested - (14,537) Gain on sale of MBS - 417 -------- ----------- Total Net Proceeds from Capital Transactions $ 1,925 $ 227,513 ========= =========== Cash available for distribution - ------------------------------- (DCF plus proceeds from Capital Transactions) $ 4,510 $ 392,463 ========= =========== Distributions: - ------------- Limited Partners $ 3,590(a) $ 384,396 ========= =========== Limited Partners Average per Unit $ .24(a) $ 25.70(b)(c) ========= =========== General Partners $ 78(a) $ 4,949(b) ========= =========== Total Distributions $ 3,668 $ 389,345 ========= =========== (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 $15.00 [$25.70 - $10.70]. 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.