UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30,1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-11987 Krupp Realty Limited Partnership-IV Massachusetts 04-2772783 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (617) 423-2233 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The total number of pages in this document is 11. PART I. FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS Unaudited June 30, December 31, 1998 1997 Multi-family apartment complexes, net of accumulated depreciation of $22,412,895 and $26,859,567, respectively (Note 3) $12,024,566 $ 14,947,503 Cash and cash equivalents 884,894 402,621 Replacement reserve and repair escrows (Note 3) - 302,985 Prepaid expenses and other assets 503,066 852,446 Deferred expenses, net of accumulated amortization of $224,586 and $218,977, respectively (Notes 2 and 3) 122,452 212,763 Total assets $13,534,978 $ 16,718,318 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable (Notes 2 and 3) $17,308,668$ 20,327,586 Accounts payable 8,120 - Due to affiliates (Note 5) 63,231 41,571 Other liabilities 774,430 1,212,728 Total liabilities 18,154,449 21,581,885 Partners' deficit (Note 4): Investor Limited Partners (30,000 Units outstanding) (2,947,705) (3,216,956) Original Limited Partner (1,367,021) (1,339,425) General Partners (304,745) (307,186) Total Partners' deficit (4,619,471) (4,863,567) Total liabilities and Partners' deficit $13,534,978 $ 16,718,318 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Revenue: Rental $1,668,950$1,902,205$3,619,131$3,791,029 Other income 45,701 13,656 69,099 27,489 Total revenue 1,714,651 1,915,861 3,688,230 3,818,518 Expenses: Operating (Note 5) 501,386 531,268 1,066,532 1,085,536 Maintenance 144,239 253,304 248,557 369,491 Real estate taxes 160,948 192,410 367,525 375,364 Management fees (Note 5) 74,890 80,562 156,551 154,855 General and administrative (Note 5) 37,481 40,291 67,819 81,493 Depreciation and amortization 392,876 517,274 879,650 1,024,683 Interest 273,476 319,549 610,119 640,283 Total expenses 1,585,2961,934,658 3,396,753 3,731,705 Income (loss) before minority interest, gain (loss) on sale of property and extraordinary loss 129,355(18,797) 291,477 86,813 Minority interest (925) (396) (2,372) (2,073) Gain (loss) on sale of property (Note 3) (11,391) - 2,967,939 - Income (loss) before extraordinary loss 117,039(19,193) 3,257,044 84,740 Extraordinary loss from early extinguishment of debt (Note 3) - - (389,523) - Net income (loss) $ 117,039$(19,193) $2,867,521$ 84,740 Allocation of net income (loss) (Note 4): Investor Limited Partners (30,000 Units outstanding): Income (loss) before gain (loss) on sale of property and extraordinary loss $ 122,009 $(18,234)$ 274,650 $ 80,503 Gain (loss) on sale of property (11,277) - 2,938,260 - Extraordinary loss - - (370,047) - Net income (loss) $ 110,732$ (18,234)$2,842,863$ 80,503 Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS, Continued (Unaudited) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Investor Limited Partners Per Unit: Income (loss) before gain (loss) on sale of property and extraordinary loss $ 4.07$ (.61) $ 9.15$ 2.68 Gain (loss) on sale of property (.38) - 97.94 - Extraordinary loss - - (12.33) - Net income (loss) $ 3.69$ (.61) $ 94.76$ 2.68 Original Limited Partner (100 Units outstanding): Income (loss) before gain (loss) on sale of property and extraordinary loss $ 5,137 $ (767) $ 11,564$ 3,390 Gain (loss) on sale of property - - - - Extraordinary loss - - (15,581) - Net income (loss) $ 5,137$ (767) $ (4,017)$ 3,390 General Partners: Income (loss) before gain (loss) on sale of property and extraordinary loss $ 1,284 $ (192) $ 2,891 $ 847 Gain (loss) on sale of property (114) - 29,679 - Extraordinary loss - - (3,895) - Net income (loss) $ 1,170$ (192) $ 28,675$ 847 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 1998 1997 Operating activities: Net income $2,867,521 $ 84,740 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 879,650 1,024,683 Interest earned on repair escrow (12,898) - Gain on sale of property (2,967,939) - Extraordinary loss from early extinguishment of debt 389,523 - Changes in assets and liabilities: Decrease in prepaid expenses and other assets 314,774 269,320 Decrease in other liabilities (438,298) (287,156) Increase (decrease) in accounts payable 6,215 (6,802) Increase (decrease) in due to affiliates 21,660 (190) Releases from real estate tax and insurance escrows due to sale of property 33,722 - Net cash provided by operating activities 1,093,930 1,084,595 Investing activities: Deposits to replacement reserve escrow (10,769) (31,430) Withdrawals from replacement reserve and repair escrows 315,159 48,982 Release from replacement reserve escrow due to sale of property 11,493 - Decrease in deferred expenses 3,191 - Increase in accounts payable for fixed asset additions 1,905 54 Additions to fixed assets (673,994)(319,283) Proceeds from sale of property, net 5,719,564 - Net cash provided by (used in) investing activities 5,366,549 (301,677) Financing activities: Principal payments on mortgage notes payable(380,876)(379,851) Distributions (2,623,425)(589,425) Repayment of mortgage note payable (2,638,042) - Payment of prepayment premium (335,863) - Net cash used in financing activities (5,978,206) (969,276) Net increase (decrease) in cash and cash equivalents 482,273 (186,358) Cash and cash equivalents, beginning of period402,621 956,012 Cash and cash equivalents, end of period $884,894 $ 769,654 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1)Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of the General Partners of Krupp Realty Limited Partnership-IV and Subsidiaries (the "Partnership"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Consolidated Financial Statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997 for additional information relevant to significant accounting policies followed by the Partnership. The consolidated financial statements present consolidated assets, liabilities and operations of Pavillion Partners, Ltd., Westbridge Partners, Ltd., and Krupp Realty Limited Partnership-IV. Westcop Corporation has a 1% interest in the operations of Westbridge Partners, Ltd. and Pavillion Partners, Ltd. At June 30, 1998, minority interest of $19,365 is included in other assets. In the opinion of the General Partners of the Partnership, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly the Partnership's consolidated financial position as of June 30, 1998, its results of operations for the three and six months ended June 30, 1998 and 1997 and its cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three and six months ended June 30, 1998 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. (2)Mortgage Notes Payable On July 31, 1997, the General Partners secured a $900,000 non-recourse note (the "Note") for Walden Pond Apartments ("Walden Pond") from the same lender which holds the first mortgage note. The Note bears interest at a rate of 9.5% per annum and, commencing September 1, 1997, requires monthly, interest-only payments until the maturity date. The Note matures on February 28, 1999, in conjunction with the first mortgage note, at which time all outstanding principal and any accrued interest is due. The Note may be prepaid in its entirety without penalty, upon 90 days written notice, and simultaneous payment of the first mortgage note. Proceeds from the Note were deposited into an escrow account and were used to fund capital improvements at the property. The Partnership paid closing costs of $23,110 to secure the Note. (3)Sale of Property On March 31, 1998, the Partnership sold Indian Run Apartments ("Indian Run"), a 256-unit multi-family apartment complex, located in Abilene, Texas, to an unaffiliated third party. The Partnership received $5,850,000, less repayment of the mortgage note payable and interest of $2,658,664 and closing costs of $130,436. For financial reporting purposes, the Partnership realized a gain of $2,967,939 on the sale. The gain was calculated as the difference between the property's selling price less net book value of the property and closing costs. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (3)Sale of Property, Continued In conjunction with the sale of the property on March 31, 1998, the Partnership prepaid the mortgage note. As a result of the retirement of debt, the Partnership incurred a prepayment premium of $335,863. The prepayment premium, as well as unamortized deferred mortgage costs of $53,660, are reported in the Statement of Operations as an extraordinary loss from early extinguishment of debt. (4) Changes in Partners' Deficit A summary of changes in Partners' deficit for the six months ended June 30, 1998 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1997$(3,216,956)$(1,339,425)$(307,186)$(4,863,567) Income before gain on sale of property and extraordinary loss 274,650 11,564 2,891 289,105 Gain on sale of property 2,938,260 - 29,679 2,967,939 Extraordinary loss (370,047) (15,581) (3,895) (389,523) Distributions: Operations (559,952) (23,579) (5,894) (589,425) Capital Transaction(2,013,660) - (20,340) (2,034,000) Balance at June 30, 1998 $(2,947,705)$(1,367,021)$(304,745)$(4,619,471) (5)Related Party Transactions The Partnership pays property management fees to an affiliate of the General Partners for management services. Pursuant to the management agreements, management fees are payable monthly at a rate of 5% of the gross receipts from the properties under management. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties, including administrative expenses. Amounts accrued or paid to the General Partners' affiliates were as follows: For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Property management fees $ 74,890 $ 80,562$ 156,551$ 154,855 Expense reimbursements 70,690 68,177 109,642 130,514 Charged to operations $145,580 $148,739$ 266,193$ 285,369 Due to affiliates consisted of expense reimbursements of $63,231 and $41,571 at June 30, 1998 and December 31, 1997, respectively. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources The Partnership's ability to generate cash adequate to meet its needs is dependent primarily upon the operations of its remaining real estate investments. Such ability would also be impacted by the future availability of bank borrowings, and upon the future refinancing and sale of the Partnership's real estate investments. These sources of liquidity will be used by the Partnership for payment of expenses related to real estate operations, capital improvements, debt service and other expenses. In order to remain competitive in their respective markets, the Partnership's properties have spent approximately $674,000 to date and are anticipated to spend approximately $1,200,000 for fixed assets in 1998. These capital improvements consist of internal and external enhancements which include the replacement of appliances, carpeting and vinyl flooring at the properties as well as extensive building exterior improvements at Pavillion and Walden Pond Apartments. The Partnership expects to fund these improvements from established reserves and proceeds from the Walden Pond additional note and the sale of Indian Run (see Notes 2 and 3). On March 31, 1998, the Partnership sold Indian Run to an unaffiliated third party. The Partnership received $5,850,000, less repayment of the mortgage note payable and interest of $2,658,664 and closing costs of $130,436 (see Note 3). On June 24, 1998, the General Partners made a special capital distribution of approximately $67.12 per Unit, based on the net proceeds from the sale of Indian Run after funding capital improvements at the Partnership's remaining properties, Partnership liabilities and maintaining reserves for contingent liabilities. As a result of the sale of the property and future capital needs, the General Partners reduced the annual distribution rate to 2% of remaining invested capital, beginning with the distribution payable in August, 1998. Financial Accounting Standards Board Statement No. 130 ("FAS 130") "Reporting Comprehensive Income" is effective for fiscal years beginning after December 31, 1997, although earlier application is permitted. FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Financial Accounting Standards Board Statement No. 131 ("FAS 131") "Disclosures about Segments of an Enterprise and Related Information" establishes standards for disclosing measures for profit or loss and total assets for each reportable segment. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Partnership does not believe that the implementation of FAS 130 or FAS 131 will have a material impact on the Partnership's financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES Operations The following discussion relates to the operations of the Partnership and its properties (Fenland Field, Pavillion and Walden Pond Apartments) for the three and six months ended June 30, 1998 and 1997. The sale of Indian Run on March 31, 1998, significantly impacts the comparability of the Partnership's operations between these periods. Net income, net of Indian Run's activity, increased during the three and six months ended June 30, 1998 when compared to the three and six months ended June 30, 1997, as the increase in total revenue more than offset the increase in total expenses. The increase in total revenue is a result of rental rate increases implemented at all of the Partnership's properties. Interest income increased due to higher cash and cash equivalent balances available for investment. Total expenses for the three and six months ended June 30, 1998, net of Indian Run's activity, increased as compared to the three and six months ended June 30, 1997, with a rise in management fees and interest expense, partially offset by decreases in maintenance, general and administrative and depreciation and amortization expenses. Management fees increased in conjunction with the increase in revenue, as discussed above. Interest expense increased as a result of the Walden Pond additional note (see Note 2). Maintenance expense decreased due to paving repairs and landscaping work completed in 1997. General and administrative expense decreased due to lower expenses incurred in connection with the preparation and mailing of Partnership reports and other investor communications. Depreciation expense decreased as fixed asset additions purchased in previous years became fully depreciated. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1.Legal Proceedings Response: None Item 2.Changes in Securities Response: None Item 3.Defaults upon Senior Securities Response: None Item 4.Submission of Matters to a Vote of Security Holders Response: None Item 5.Other Information Response: None Item 6.Exhibits and Reports on Form 8-K (a)Exhibits Response: None (b)Reports on Form 8-K Date Event Reported Financial Statements Filed April 16, 1998 Disposition of Indian Run ProForma Balance Sheet at Apartments. December 31, 1997. Pro Forma Statement of Operations for the year ended December 31, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Krupp Realty Limited Partnership-IV (Registrant) BY:/s/Wayne H. Zarozny Wayne H. Zarozny Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner DATE: August 11, 1998