UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 2-68727 Krupp Associates 1980-1 (Exact name of registrant as specified in its charter) Massachusetts 04-2708956 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (617) 423-2233 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partner Interests 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: Part IV, Item 14. The exhibit index is located on pages 8 - 10. The total number of pages in this document is 25. 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 Associates 1980-1 ("KRLP-I") is a limited partnership formed on July 31, 1980, pursuant to the provisions of the Massachusetts Uniform Limited Partnership Act. The Krupp Company and The Krupp Corporation serve as the General Partners of KRLP-I. Chivas Square Associates serves as the Original Limited Partner of KRLP-I. On November 10, 1980, KRLP-I commenced an offering of $4,000,000 of Class A Limited Partner Interests in Units of $1,000 each (the "Units"), which was successfully completed on April 30, 1981. (For further details, see Note A of Notes to Consolidated Financial Statements included in Item 8 (Appendix A) of this report). The primary business of KRLP-I has been to invest in, operate, refinance, and ultimately dispose of fully developed, income producing residential properties and related assets. KRLP-I considers itself to be engaged in the industry segment of investment in real estate. On January 20, 1988, the General Partners formed Krupp Associates Riverside Limited Partnership ("Realty-I") as a prerequisite for the refinancing of Riverside Apartments. At the same time, the General Partners transferred ownership of the property to Realty-I. The General Partner of Realty-I is The Krupp Corporation ("Krupp Corp."). The Limited Partner of Realty-I is KRLP-I. Krupp Corp. has beneficially assigned its interest in Realty-I to KRLP-I. KRLP-I and Realty-I are collectively known as Krupp Realty Limited Partnership-I (collectively the "Partnership"). The Partnership's remaining real estate investment, Riverside I Apartments ("Riverside"), is a 140-unit apartment complex with approximately 30,000 square feet of commercial retail space located in Evansville, Indiana. Riverside is subject to some seasonal fluctuations due to changes in utility consumption and seasonal maintenance expenditures. However, the future performance of the Partnership will depend upon factors which cannot be predicted. Such factors include general economic and real estate market conditions, both on a national basis and in the area where the Partnership's investment is located, real estate tax rates, operating expenses, energy costs, government regulations, and federal and state income tax laws. The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the Partnership's operations, and no adverse effect therefrom is anticipated in the future. Riverside is also subject to such risks as (i) competition from existing and future projects held by other owners in the area in which the Partnership's property operates, (ii) possible reduction in rental income due to an inability to maintain high occupancy levels and rental rates, (iii) possible adverse changes in general economic and local conditions such as competitive over-building, increased unemployment, adverse changes in real estate zoning laws, (iv) the possible future adoption of rent control legislation which would not permit the full amount of increased costs to be passed on to tenants in the form of rent increases, and (v) other circumstances over which the Partnership may have little or no control. As of December 31, 1996, there were 7 full or part-time on-site project personnel employed by the Partnership. ITEM 2. PROPERTIES A summary of the Partnership's real estate investment is presented below. Schedule III, included in Appendix A, to this report contains additional detailed information with respect to the property. Current For the Years Ended Year of Leasable December 31, Description Acquisition Square Footage 1996 1995 1994 1993 1992 Riverside I Apartments 1981 140 Units 95% 97% 96% 97% 97% Evansville, Indiana 30,000 Sq. Ft. 96% 90% 87% 83% 87% ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or to which its property 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 The transfer of Units is subject to certain limitations contained in the Partnership Agreement. There is no public market for the Units and it is not anticipated that any such public market will develop. The number of Class A Limited Partners as of December 31, 1996 was approximately 400. One of the objectives of the Partnership is to generate cash available for distribution. However, there is no assurance that future operations will generate cash available for distribution. The Partnership has not made distributions since 1988 due to insufficient operating cash flow. The Partnership does not anticipate resuming distributions until the Partnership generates sufficient operating cash flow. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the Partnership's consolidated financial position and operating results. The information is comparable and should be read in conjunction with Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and the Financial Statements, which are included in Items 7 and 8 of this report, respectively. Year Ended December 31, 1996 1995 1994 1993 1992 Total revenue $1,110,308 $1,056,448 $ 984,493 $ 914,910 $ 880,471 Net loss $ (106,679) $ (153,650) $ (183,110) $ (196,057) $ (313,519) Net loss allocated to: Class A Limited Partners (96,011) (13,122) (78,034) (36,542) (176,896) Per Unit (24.00) (3.28) (19.51) (9.14) (44.22) Original Limited Partner (9,601) - - - - General Partners (1,067) (140,528) (105,076) (159,515) (136,623) Total assets 2,451,402 2,467,327 2,539,119 2,603,526 2,818,242 Long-term liabilities (1) 3,455,971 3,473,092 3,488,515 3,502,297 3,526,345 (1) Includes demand notes payable, since the General Partners expect they will be long-term obligations. Prior performance of the Partnership is not necessarily indicative of future operations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources The Partnership's ability to generate cash adequate to meet its needs is dependent primarily upon the operating performance of Riverside and the eventual sale of the asset. These sources of liquidity could be used by the Partnership for payment of expenses related to real estate operations, debt service and expenses. Cash Flow and Capital Transaction Proceeds, if any, as calculated under Section 8.2(a) and 8.3(a) of the Partnership Agreement, would then be available for distribution to the Partners. The Partnership has discontinued distributions due to insufficient operating cash flow. The Partnership has experienced cash flow deficiencies for several years and currently has very limited liquidity. Expenditures are being monitored closely and capital improvements are made on an as-needed basis. To date, the General Partners have been able to arrange financing through borrowings, from an affiliate of the General Partners, to cover a substantial portion of these cash flow deficiencies. Also, one of the General Partners, The Krupp Company, contributed an additional $100,000 to the Partnership during 1991. In January 1993, The Krupp Company loaned an additional $135,000 to the Partnership in the form of a demand note, which was used to payoff a demand note from an unaffiliated bank. In addition, the affiliate lender has been willing to defer interest payments on the borrowings since late 1990. Furthermore, the General Partners, have arranged for the waiver of property management fees and expense reimbursements payable to the management agent, also an affiliate of the General Partners. The General Partners anticipate operating deficits to continue and cannot guarantee that they will be able to take actions that will cover any future deficits. If the property is unable to generate funds sufficient to cover these deficits, the Partnership could default on its mortgage payments and become subject to foreclosure proceedings. However, as of December 31, 1996, the Partnership is current on its mortgage payments. In January 1996, the General Partners entered into a purchase and sale agreement for the sale of Riverside to an unaffiliated buyer. Two weeks before the scheduled sale date, the buyer rescinded his offer. The General Partners continue to actively pursue the sale of Riverside Apartments. In the event the property is sold, the Partnership will be liquidated. It is anticipated that all sale proceeds will be used to satisfy Partnership obligations and no funds will be available to investors for distribution. Cash Flow Shown below, as required by the Partnership Agreement, is the calculation of Cash Flow of the Partnership for the year ended December 31, 1996. 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, Cash Flow should not be considered by the reader as a substitute to net income (loss), as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Rounded to $1,000 Net income for tax purposes $ 10,000 Items not requiring (requiring) the use of operating funds: Tax basis depreciation and amortization 69,000 Principal payments on mortgage (15,000) Expenditures for capital improvements (95,000) Cash Deficit $ (31,000) Operations 1996 compared to 1995 Cash deficit improved in 1996, as compared to 1995, due to decreased capital improvement expenditures and improved net income, as increases in rental revenue more than offset the increase in expenses. Riverside experienced an increase in rental revenue due to increases in residential rental rates and a rise in commercial occupancy, from an average occupancy rate of 90% in 1995 to 96% in 1996. Total expenses remained stable for 1996 as compared to 1995, with an increase in operating expenses offset by a decrease in interest expense. The increase in operating expense is related to a rise in utility expenditures, due to higher consumption resulting from a colder winter season, and an increase in insurance expense, as prior year balance reflected insurance refunds received in 1995. The decrease in interest expense is attributable to a decline in the prime rate from an average rate of 8.8% in 1995 to 8.3% in 1996. 1995 compared to 1994 In comparing 1995 to 1994, the increase in cash deficit is attributable to increased capital expenditures. Net income improved by $30,000, as increases in rental revenue more than offset the increase in expenses. Riverside showed a 7% increase in rental revenue due to increased occupancy and management's successful effort in leasing 100% of the commercial space in the fourth quarter of 1995. Overall total expenses increased approximately 4%, with a decrease in operating expense offset by increases in maintenance and interest expenses. Operating expense decreased due to lower leasing costs resulting from higher occupancy levels, decreased utilities expense because of the warmer winter season and a reduction in insurance expense due to a favorable claim history. Maintenance expense increased as a result of painting interior stairways and pavement repairs made to the sidewalks. The increase in interest expense is attributable to a rise in the prime rate from an average 7.1% in 1994 to 8.8% in 1995. General In accordance with Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which is effective for fiscal years beginning after December 15, 1995, the Partnership has implemented policies and practices for assessing impairment of its real estate asset. The investment in the property is carried at cost less accumulated depreciation unless the General Partners believe there is a significant impairment in value, in which case a provision to write down the investment in property to fair value will be charged against income. At this time, the General Partners do not believe that the asset of the Partnership is significantly impaired. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Appendix A of 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 both a General Partner of KRLP-I and The Krupp Company, the other General Partner of KRLP-I, is as follows: Position with Name and Age The Krupp Corporation Douglas Krupp (50) Co-Chairman of the Board George Krupp (52) Co-Chairman of the Board Laurence Gerber (40) President Robert A. Barrows (39) Treasurer Douglas Krupp is Co-Chairman and Co-Founder of The Berkshire Group. Established in 1969 as the Krupp Companies, this real estate-based firm expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking, healthcare facility ownership and the management of the Company. Today, The Berkshire Group is an integrated real estate, mortgage and healthcare company which is headquartered in Boston with regional offices throughout the country. A staff of approximately 3,400 are responsible for the more than $4 billion under management for institutional and individual clients. Mr. Krupp is a graduate of Bryant College. In 1989 he received an honorary Doctor of Science in Business Administration from this institution and was elected trustee in 1990. Mr. Krupp is Chairman of the Board and a Director of both Berkshire Realty Company, Inc. (NYSE-BRI) and Harborside Healthcare (NYSE-HBR). George Krupp is Douglas Krupp's brother. George Krupp is the Co-Chairman and Co-Founder of The Berkshire Group. Established in 1969 as the Krupp Companies, this real estate-based firm expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking and healthcare facility ownership. Today, The Berkshire Group is an integrated real estate, mortgage and healthcare company which is headquartered in Boston with regional offices throughout the country. A staff of approximately 3,400 are responsible for more than $4 billion under management for institutional and individual clients. Mr. Krupp attended the University of Pennsylvania and Harvard University. Mr. Krupp also serves as Chairman of the Board and Trustee of Krupp Government Income Trust and as Chairman of the Board and Trustee of Krupp Government Income Trust II. Laurence Gerber is the President and Chief Executive Officer of The Berkshire Group. Prior to becoming President and Chief Executive Officer in 1991, Mr. Gerber held various positions with The Berkshire Group which included overall responsibility at various times for: strategic planning and product development, real estate acquisitions, corporate finance, mortgage banking, syndication and marketing. Before joining The Berkshire Group in 1984, he was a management consultant with Bain & Company, a national consulting firm headquartered in Boston. Prior to that, he was a senior tax accountant with Arthur Andersen & Co., an international accounting and consulting firm. Mr. Gerber has a B.S. degree in Economics from the University of Pennsylvania, Wharton School and an M.B.A. degree with high distinction from Harvard Business School. He is a Certified Public Accountant. Mr. Gerber also serves as Director of Berkshire Realty Company, Inc. (NYSE-BRI) and Harborside Healthcare Corporation (NYSE-HBR) as well as President and Trustee of Krupp Government Income Trust and President and Trustee of Krupp Government Income Trust II. Robert A. Barrows is Senior Vice President and Chief Financial Officer of The Berkshire Group. Mr. Barrows has held several positions within The Berkshire Group since joining the company in 1983 and is currently responsible for accounting and financial reporting, treasury, tax, payroll and office administrative activities. Prior to joining The Berkshire Group, he was an audit supervisor for Coopers & 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, 1996, no person of record owned, or was known by the General Partners to own, beneficially more than 5% of the Partnership's 4,000 outstanding Units. On that date, the General Partners or their affiliates owned 105 Units (3% of the total outstanding) of the Partnership, in addition to their General Partner interests and a portion of the Original Limited Partner interest. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership does not have any directors, executive officers or nominees for election as director. Additionally, as of December 31, 1996 no person of record owned or was known by the General Partners to own beneficially more than 5% of the Partnership's outstanding Units. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements - See Index to Consolidated Financial Statements included under Item 8 (Appendix A) on page F-2 of this report. 2. Consolidated Financial Statement Schedule III is included under Item 8 (Appendix A) on page F-14 of this report. Certain other schedules are omitted as they are not applicable, not required or the information is provided in the consolidated financial statements or the notes thereto. (b) Exhibits: Number and Description Under Regulation S-K The following reflects all applicable exhibits required by 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 May 15, 1981 [Exhibit 4.1 to Registrant's Report on Form 10-K for 1982 (File 2-68727)].* (4.2) Fourth Amendment to Certificate of Limited Partnership filed with the Massachusetts Secretary of State on October 19, 1981 [Exhibit 4.2 to Registrant's Report on Form 10-K for 1982 (File 2-68727)].* (10) Material contracts: Riverside I Apartments (10.1) Contract and Certificate of Limited Partnership of Krupp Associates Riverside Limited Partnership dated January 20, 1988 between The Krupp Corporation (the "General Partner") and Krupp Associates 1980-1 (the "Limited Partner")[Exhibit 10.1 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.2) Assignment dated January 20, 1988 between Krupp Associates 1980-1("Assignee") and The Krupp Corporation ("Assignor") [Exhibit 10.2 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.3) Bill of Sale dated January 20, 1988 between Krupp Associates 1980-1 (as "Seller") and Krupp Associates Riverside Limited Partnership (as "Buyer")[Exhibit 10.3 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.4) Special Warranty Deed dated January 20, 1988 between Krupp Associates 1980-1 ("Grantor") and Krupp Associates Riverside Limited Partnership ("Grantee")[Exhibit 10.4 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.5) Assignment dated January 20, 1988 between Krupp Associates 1980-1 ("Assignor") and Krupp Associates Riverside Limited Partnership ("Assignee")[Exhibit 10.5 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.6) Management Agreement dated January 28, 1988 between Krupp Associates Riverside Limited Partnership, as Owner, and Krupp Asset Management Company, now known as Berkshire Property Management, as Agent. [Exhibit 10.6 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.7) Regulatory Agreement for Multifamily Housing Projects Co-insured by HUD dated January 21, 1988 between Krupp Associates Riverside Limited Partnership (the "Owner") and DRG Funding Corporation (the "Mortgagee") [Exhibit 10.7 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2-68727)].* (10.8) Mortgage Note dated January 21, 1988, from Krupp Associates Riverside Limited Partnership, an Indiana limited partnership, to DRG Funding Corporation, a Delaware corporation. [Exhibit 10.6 to Registrant's Report on Form 10-K for the year ended December 31, 1987 (File No. 2-68727)].* (10.9) Mortgage Note dated January 21, 1988, from Krupp Associates Riverside Limited Partnership, an Indiana limited partnership, to DRG Funding Corporation, a Delaware corporation. [Exhibit 10.7 to Registrant's Report on Form 10-K for the year ended December 31, 1987 (File No. 2-68727)].* (10.10) Security Agreement dated January 21, 1988 between Krupp Associates Riverside Limited Partnership ("Debtor") and DRG Funding Corporation ("Creditor") [Exhibit 10.10 to Registrant's Report on Form 10-K for the year ended December 31, 1988 (File No. 2- 68727)].* (10.11) Escrow Deposit Agreement dated January 21, 1988, between Krupp Associates Riverside Limited Partnership, an Indiana limited partnership, and DRG Funding Corporation, a Delaware corporation. [Exhibit 10.8 to Registrant's Report on Form 10-K for the year ended December 31, 1987 (File No. 2- 68727)].* * Incorporated by reference (c) Reports on Form 8-K During the last quarter of the year ended December 31, 1996, the Partnership did not file any reports on Form 8-K. 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 st day of March, 1997. KRUPP ASSOCIATES 1980-1 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 st day of March, 1997. Signatures Titles /s/Douglas Krupp Co-Chairman (Principal Executive Officer) Douglas Krupp and Director of The Krupp Corporation, a General Partner. /s/George Krupp Co-Chairman (Principal Executive Officer) George Krupp and Director of The Krupp Corporation, a General Partner. /s/Laurence Gerber President of The Krupp Corporation, a Laurence Gerber general Partner. /s/Robert A. Barrows Treasurer of The Krupp Corporation, a Robert A. Barrows general Partner. APPENDIX A KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE ITEM 8 OF FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 1996 KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Accountants F-3 Consolidated Balance Sheets at December 31, 1996 and F-4 December 31, 1995. Consolidated Statements of Operations For the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Changes in Partners' Deficit For the Years Ended December 31, 1996, 1995 and 1994 F-6 Consolidated Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-8 - F-13 Schedule III - Real Estate and Accumulated Depreciation F-14 All other schedules are omitted as they are not applicable, not required, or the information is provided in the consolidated financial statements or the notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Associates 1980-1 and Subsidiary: We have audited the consolidated financial statements and the financial statement schedule of Krupp Associates 1980-1 and Subsidiary (the "Partnership") listed in the index on page F-2 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management of the Partnership, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Krupp Associates 1980-1 and Subsidiary as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note K to the financial statements, the Partnership has experienced cash flow deficiencies in the past. In connection therewith the General Partners, to date, have been able to arrange financing to cover these deficits, and effective January 1, 1991 the General Partners obtained a waiver of management fees and expense reimbursements due to the affiliated management agent. The General Partners cannot guarantee that they will be able to continue to arrange for financing to cover deficits as they arise or that the arrangement with the management agent will continue. In the event the property is ultimately sold, the Partnership would be liquidated. These factors raise substantial doubt about the ability of the Partnership to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Boston, Massachusetts COOPERS & LYBRAND L.L.P. February 1, 1997 KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 ASSETS 1996 1995 Multi-family apartment complex, net of accumulated depreciation of $2,730,441 and $2,549,375, respectively (Note C) $ 2,093,819 $ 2,180,147 Cash 75,012 11,153 Cash restricted for tenant security deposits 38,004 37,288 Replacement reserve escrow (Note D) 49,030 45,427 Prepaid expenses and other assets 86,267 79,852 Deferred expenses, net of accumulated amortization of $37,355 and $33,165, respectively 109,270 113,460 Total assets $ 2,451,402 $ 2,467,327 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage note payable (Notes C and D) $ 2,215,574 $ 2,231,009 Notes payable (Notes E and H) 1,257,385 1,257,385 Accounts payable 93,704 117,977 Accrued expenses and other liabilities (Note F) 242,244 230,299 Accrued interest due to an affiliate (Notes E and H) 637,842 519,325 Total liabilities 4,446,749 4,355,995 Partners' deficit (Note G): Class A Limited Partners (4,000 Units outstanding) (272,656) (176,645) Original Limited Partner (436,216) (426,615) General Partners (1,286,475) (1,285,408) Total Partners' deficit (1,995,347) (1,888,668) Total liabilities and Partners' deficit $ 2,451,402 $ 2,467,327 The accompanying notes are an integral part of the consolidated financial statements. KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Revenue: Rental (Note I) $1,106,772 $1,050,835 $ 981,018 Other income 3,536 5,613 3,475 Total revenue 1,110,308 1,056,448 984,493 Expenses: Operating (Note H) 395,788 383,364 395,828 Maintenance 106,160 100,470 76,781 Real estate taxes 129,904 127,913 133,951 General and administrative 36,713 38,393 31,979 Depreciation and amortization 185,256 188,426 177,796 Interest (Notes D, E and H) 363,166 371,532 351,268 Total expenses 1,216,987 1,210,098 1,167,603 Net loss (Note J) $ (106,679) $ (153,650) $(183,110) Allocation of net loss (Note G): Class A Limited Partners $ (96,011) $ (13,122) $ (78,034) Per Unit of Class A Limited Partner Interest (4,000 Units outstanding) $ (24.00) $ (3.28) $ (19.51) Original Limited Partner $ (9,601) $ - $ - General Partners $ (1,067) $ (140,528) $(105,076) The accompanying notes are an integral part of the consolidated financial statements. KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT For the Years Ended December 31, 1996, 1995 and 1994 Class A Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1993 $ (85,489) $(426,615) $(1,039,804) $(1,551,908) Net loss (78,034) - (105,076) (183,110) Balance at December 31, 1994 (163,523) (426,615) (1,144,880) (1,735,018) Net loss (13,122) - (140,528) (153,650) Balance at December 31, 1995 (176,645) (426,615) (1,285,408) (1,888,668) Net loss (Note G) (96,011) (9,601) (1,067) (106,679) Balance at December 31, 1996 $(272,656) $(436,216) $(1,286,475) $(1,995,347) The accompanying notes are an integral part of the consolidated financial statements. KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Operating activities: Net loss $(106,679) $(153,650) $(183,110) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 185,256 188,426 177,796 Decrease (increase) in cash restricted for tenant security deposits (716) 4,241 (711) Increase in prepaid expenses and other assets (6,415) (15,492) (3,055) Increase (decrease) in accounts payable (15,222) (35,068) 9,393 Increase in accrued expenses and other liabilities 11,945 2,372 15,475 Increase in interest due to an affiliate 118,517 125,279 103,839 Net cash provided by operating activities 186,686 116,108 119,627 Investing activities: Additions to fixed assets (94,738) (146,079) (75,328) Increase (decrease) in accounts payable related to fixed asset additions (9,051) 3,179 2,789 Decrease (increase) in replacement reserve escrow (3,603) 7,017 5,493 Net cash used in investing activities (107,392) (135,883) (67,046) Financing activity: Principal payments on mortgage note payable (15,435) (13,904) (12,793) Net increase (decrease) in cash 63,859 (33,679) 39,788 Cash, beginning of year 11,153 44,832 5,044 Cash, end of year $ 75,012 $ 11,153 $ 44,832 The accompanying notes are an integral part of the consolidated financial statements KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Organization Krupp Associates 1980-1 ("KRLP-I") was formed on July 31, 1980 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. KRLP-I issued all of the General Partner Interests to two General Partners (The Krupp Company and The Krupp Corporation) in exchange for capital contributions totaling $5,000. The Class B Limited Partner Interests were issued to Chivas Square Associates (the "Original Limited Partner"), in connection with the transfer by the Original Limited Partner to KRLP-I of the real estate property which it formerly owned, subject to the related mortgage note payable. On November 10, 1980, KRLP-I commenced an offering of $4,000,000 of Class A Limited Partner Interests in Units of $1,000 each (the "Units"), which was successfully completed on April 30, 1981. As of December 31, 1996, there were 4,000 Units of Class A Investor Limited Partner Interests outstanding. On January 20, 1988, the General Partners formed Krupp Associates Riverside Limited Partnership ("Realty-I") as a prerequisite for the refinancing of Riverside Apartments. At the same time, the General Partners transferred ownership of the property to Realty-I. The General Partner of Realty-I is The Krupp Corporation ("Krupp Corp."). The Limited Partner of Realty-I is KRLP-I. Krupp Corp. has beneficially assigned its interest in Realty-I to KRLP-I. KRLP-I and Realty-I are collectively known as Krupp Realty Limited Partnership-I (collectively the "Partnership"). 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 (see Note J). Basis of Presentation The consolidated financial statements present the consolidated assets, liabilities and operations of KRLP-I and Realty-I (see Note A). All intercompany balances and transactions have been eliminated. Risks and Uncertainties The Partnership invests its cash primarily in deposits and money market funds with commercial banks. The Partnership has not experienced any losses to date on its invested cash. The preparation of financial statements in conformity with generally accepted accounting principles 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 reporting period. Actual results could differ from those estimates. 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 cash investments are recorded at cost, which approximates current market values. Rental Revenues Leases require the payment of base rent monthly in advance. Rental revenues are recorded on the accrual basis. Depreciation Depreciation is provided for by the use of the straight-line method over the estimated useful life of the related asset as follows: Buildings and improvements 5 to 35 years Appliances, carpeting and equipment 3 to 5 years Impairment of Long-Lived Asset In accordance with Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of", which is effective for fiscal years beginning after December 15, 1995, the Partnership has implemented policies and practices for assessing impairment of its real estate asset. The investment in the property is carried at cost less accumulated depreciation unless the General Partners believe there is a significant impairment in value, in which case a provision to write down the investment in property to fair value will be charged against income. At this time, the General Partners do not believe that the asset of the Partnership is significantly impaired. Deferred Expenses The Partnership is amortizing the costs associated with refinancing the property over the term of the related mortgage using the straight-line method. Income Taxes The Partnership is not liable for federal or state income taxes as the Partnership's income or loss 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 the Partnership's taxable income or loss, such change will be reported to the Partners. C. Property The Partnership purchased Riverside I Apartments ("Riverside"), a 140- unit apartment complex with approximately 30,000 square feet of commercial space located in Evansville, Indiana, on February 13, 1981. The total purchase price for Riverside was $3,518,000, of which $1,842,200 was paid in cash and $1,675,800 was financed with a 40-year non-recourse mortgage payable to the Department of Housing and Urban Development ("HUD"). On January 21, 1988, the Partnership refinanced Riverside under a $2,310,000 non-recourse first mortgage note payable between Realty-I (in which KRLP-I has a 100% beneficial interest) and HUD. (See below for additional information.) The note is collateralized by Riverside. The Partnership paid off the prior mortgage note with a portion of the proceeds. D. Mortgage Note Payable The non-recourse first mortgage note is payable in equal monthly installments of $20,747 at an interest rate of 10.5% per annum based on a thirty-five year amortization schedule. The note matures on February 1, 2023, when the remaining principal and any accrued interest will be due and payable. Under the Regulatory Agreement with HUD, monthly deposits of $4,036 must be contributed to a reserve for replacements. The reserve for replacements is to be used to fund property improvements. In addition, the Regulatory Agreement requires HUD approval for any additional encumbrances or for transfer of title to the project, and limits distributions based on the project's operations to the extent of "surplus cash" as defined in the Regulatory Agreement. Based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities, the fair value of long-term debt is approximately $2,700,000 and $2,800,000 for the years ended December 31, 1996 and 1995 respectively. Principal payments due on the mortgage note payable are $16,988, $18,860, $20,939, $23,246 and $25,808 for the five years 1997 through 2001, respectively. During 1996, 1995 and 1994, the Partnership paid $233,527, $235,059, and $236,169, respectively, of interest on its mortgage note payable. E. Notes Payable The Partnership had demand notes outstanding with the General Partners and an affiliate of the General Partners at December 31, 1996 and 1995, in the amount of $1,257,385. Interest is accrued monthly at the prime rate of an unaffiliated bank (8.25% at December 31, 1996) plus one percent per annum. During 1996, 1995 and 1994, no interest was paid on these notes. The carrying value of the notes approximates fair value. F. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities at December 31, 1996 and 1995 consist of the following: 1996 1995 Accrued real estate taxes $130,730 $133,334 Tenant security deposits 31,852 32,004 Deferred income 5,420 4,230 Accrued expenses, other 74,242 60,731 $242,244 $230,299 G. Partners' Deficit Under the terms of the Partnership Agreement, profits and losses from operations are allocated 90% to the Class A Limited Partners, 9% to the Original Limited Partner and 1% to the General Partners until such time that the Class A Limited Partners have received a return of their total invested capital. Thereafter, 40% shall be allocated to the Class A Limited Partners, 20% to the Original Limited Partner and 40% to the General Partners. Under the terms of the Partnership Agreement, capital transactions are allocated 90% to the Class A Limited Partners, 9% to the Original Limited Partner and 1% to the General Partners, until such time that the Class A Limited Partners have received a return of their total invested capital and thereafter, allocated 40% to the Class A Limited Partners, 20% to the Original Limited Partner and 40% to the General Partners. In general, the allocation of profits and losses are calculated based on the terms of the Partnership Agreement, as described above. However, the Internal Revenue Code contains rules which govern the allocation of tax losses among partners. For the years 1992 through 1995, the allocation of tax losses were calculated based on these rules. Under this code, tax losses are not allocated to a limited partner if a general partner bears the economic risk for that loss. Due to operating losses incurred during these years, the General Partners undertook additional liabilities on behalf of the Partnership. As a result, the Partnership allocated additional tax losses to the General Partners. In conjunction with the tax election referred to above, the financial statements presented herein reflect the allocation of net loss in accordance with the rules of the Internal Revenue Code. As of December 31, 1996, the following cumulative partner contributions and allocations have been made since inception of the Partnership: Class A Original Limited Limited General Partners Partner Partners Total Capital contributions $ 4,000,000 $ (78,613) $ 105,000 $ 4,026,387 Syndication costs (480,000) - - (480,000) Distributions (760,000) (76,000) (8,445) (844,445) Net loss from operations (5,007,595) (479,097) (1,404,974) (6,891,666) Net income from sales and restructuring 1,974,939 197,494 21,944 2,194,377 $ (272,656) $(436,216) $(1,286,475) $(1,995,347) H. Related Party Transactions Commencing with the date of acquisition of the Partnership's property, the Partnership entered into an agreement under which property management fees are paid to an affiliate of the General Partners for services as management agent. Such agreement provides for management fees payable monthly at a rate of 5% of the gross receipts from the property under management. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its property including accounting, computer, insurance, travel, legal and payroll costs relating to the preparation and mailing of reports and other communications to the Limited Partners. Since January 1, 1991, the General Partners arranged with the management agent for the annual waivers of management fees and expense reimbursements. During 1996, 1995 and 1994, interest on borrowings accrued to the General Partners or affiliates of the General Partners were $118,517, $125,279, and $103,839, respectively. I. Future Base Rents Due Under Commercial Operating Leases Future base rents due under commercial operating leases for the years 1997 through 2001 and thereafter are as follows: 1997 $190,308 1998 154,970 1999 16,902 2000 - 2001 - Thereafter - J. Federal Income Taxes For federal income tax purposes, the Partnership is depreciating its property using the accelerated cost recovery system ("ACRS") and the modified accelerated cost recovery system ("MACRS"), depending on which is applicable. The reconciliation of the net loss reported in the accompanying Consolidated Statement of Operations with the net income (loss) reported in the Partnership's federal income tax return for the years ending December 31, 1996, 1995, and 1994 is as follows: 1996 1995 1994 Net loss per Consolidated Statement of Operations $(106,679) $(153,650) $(183,110) Add: Difference between book and tax depreciation 116,611 9,419 (2,306) Net income (loss) for federal income tax purposes $ 9,932 $(144,231) $(185,416) The allocation of net income for federal income tax purposes for 1996 is as follows: Portfolio Passive Income Income Total Class A Limited Partners $ 3,449 $ 5,490 $ 8,939 Original Limited Partner 345 549 894 General Partners 38 61 99 $ 3,832 $ 6,100 $ 9,932 For the years ended December 31, 1996, 1995 and 1994, the per Unit net income (loss) for the Class A Limited Partners for federal income tax purposes was $2.23, $(3.08) and $(19.75), respectively. The basis of the Partnership's assets for financial reporting purposes exceeds its tax basis by approximately $1,600,000 and $1,710,000 at December 31, 1996 and 1995, respectively. The tax and book bases of the Partnership's liabilities are the same. K. Operating Deficits The Partnership has experienced cash flow deficiencies for several years. In connection therewith, the General Partners, to date, have been able to arrange financing through short-term borrowings from affiliates to cover a substantial portion of these deficits. Also, one of the General Partners, The Krupp Company, contributed an additional $100,000 to the Partnership during 1991. Additionally, the General Partners have arranged for the waiver of property management fees and expense reimbursements payable to the management agent from 1991 to 1996. In January 1993, The Krupp Company loaned $135,000 in the form of a demand note to the Partnership to payoff a demand note from an unaffiliated bank. Operating deficits could continue and the General Partners cannot guarantee that they will be able to take actions that will cover any future deficits. In that event, the Partnership could default on its mortgage payments and become subject to foreclosure proceedings. This would have a significant impact on the financial position and operations of the Partnership. However, the Partnership is current on its mortgage payments, and it cannot presently be determined if a foreclosure will occur in the future. Accordingly, the financial statements do not include any adjustments that might result from the outcome of these uncertainties, all of which raise substantial doubt about the ability of the Partnership to continue as a going concern. In the event of the sale of Riverside, the Partnership would be liquidated. As a result of the liquidation, the Partners would receive allocations of taxable income equivalent to any negative account balance they may have. In addition, there would be no cash available in connection with such income. Therefore, in the event that the Partner does not have items which could offset such income, the Partner would have to pay taxes with funds from other sources. KRUPP ASSOCIATES 1980-1 AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1996 Costs Capitalized Initial Cost Subsequent to to Partnership Acquisition Building Building and and Description Encumbrance Land Improvements Improvements Riverside I Apts Evansville, Indiana $ 2,215,574 $525,000 $ 3,021,592 $ 1,277,668 Gross Amounts Carried at End of Year Building and Accumulated Land Improvements Total Depreciation $525,000 $ 4,299,260 $4,824,260 $ 2,730,441 Year Construction Year Depreciable Completed Acquired Life 1973 1981 3-35 years Reconciliation of Real Estate and Accumulated Depreciation for each of the three years in the period ended December 31, 1996: 1996 1995 1994 Real Estate Balance at beginning of year $4,729,522 $4,583,443 $4,508,115 Improvements 94,738 146,079 75,328 Balance at end of year $4,824,260 $4,729,522 $4,583,443 Accumulated Depreciation Balance at beginning of year $2,549,375 $2,365,138 $2,191,531 Depreciation expense 181,066 184,237 173,607 Balance at end of year $2,730,441 $2,549,375 $2,365,138 The Partnership uses the cost basis for property valuation for both income tax and financial statement purposes. The aggregate cost for income tax purposes at December 31, 1996 is $4,299,260, and the aggregate accumulated depreciation for federal income tax purposes is $(3,799,028).