UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) 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, 1998 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 0-11987 Krupp Realty Limited Partnership-IV (Exact name of registrant as specified in its charter) Massachusetts 04-2772783 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (617) 523-7722 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Investor Limited Partner Interest 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 10-13. The total number of pages in this document is 33. 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 Realty Limited Partnership-IV ("KRLP- IV") was formed on December 1, 1982 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership-II, a Massachusetts limited partnership, are the General Partners of KRLP-IV. KRLP-IV has also issued all of the Original Limited Partner Interests to The Krupp Company Limited Partnership-II. On January 18, 1983, KRLP-IV commenced the offering of up to 30,000 units of Investor Limited Partner Interests (the "Units"). As of March 31, 1983, KRLP-IV received subscriptions for all 30,000 Units at $1,000 per Unit and therefore, the public offering was successfully completed on that date. For details, see Note A to Consolidated Financial Statements included in Item 8 (Appendix A) of this report. The primary business of KRLP-IV is to acquire, operate and ultimately dispose of real estate. KRLP-IV initially acquired six multi-family apartment complexes (Copper Creek, Walden Pond (formerly Westbridge), Indian Run, Fenland Field, Pavillion and Tilbury Woods Apartments), a retail center (Lakeview Plaza) and invested in a joint venture in Lakeview Tower (the "Joint Venture") with an affiliated limited partnership. KRLP-IV considers itself to be engaged in only one industry segment, investment in real estate. KRLP-IV sold Lakeview Plaza and Tilbury Woods Apartments in 1990 and 1991, respectively. Additionally, KRLP-IV received a terminating capital distribution from the Joint Venture with proceeds from the sale of Lakeview Tower in 1992. In 1990, the General Partners formed three limited partnerships: Pavillion Partners, Ltd., Copper Creek Partners, Ltd. and Westbridge Partners, Ltd. At the same time, the General Partners transferred ownership of Pavillion Apartments to Pavillion Partners, Ltd., Copper Creek Apartments to Copper Creek Partners, Ltd., and Walden Pond Apartments to Westbridge Partners, Ltd. in exchange for a 99% Limited Partner Interest in the new entities. Westcop Corporation, an affiliate of KRLP-IV, contributed a total of $11,216 in exchange for a 1% General Partner Interest in the new entities. KRLP-IV, Pavillion Partners, Ltd., Copper Creek Partners, Ltd. and Westbridge Partners, Ltd., are collectively known as Krupp Realty Limited Partnership-IV and Subsidiaries (collectively referred to herein as the "Partnership"). The Partnership endeavored to renegotiate the debt on these properties, the negotiations were unsuccessful and these partnerships subsequently petitioned for relief under federal bankruptcy laws. On March 31, 1998, the Partnership sold Indian Run Apartments, a 256-unit multi-family apartment complex, located in Abilene, Texas, to an unaffiliated third party (see Note D to Consolidated Financial Statements, included in Item 8 (Appendix A) of this report). The Partnership's real estate investments are subject to some seasonal fluctuations resulting from 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 those areas where the Partnership's real estate investments are located, the availability and cost of borrowed funds, 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. The Partnership's investments in real estate are also subject to such risks as (i) competition from existing and future projects held by other owners in the locations of the Partnership's properties, (ii) possible reduction in rental income due to an inability to maintain high occupancy levels, (iii) possible adverse changes in mortgage interest rates, (iv) possible adverse changes in general economic and local conditions, such as competitive over-building, increases in unemployment, or adverse changes in real estate zoning laws, (v) 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 (vi) other circumstances over which the Partnership may have little or no control. As of December 31, 1998, the Partnership did not employ any personnel. ITEM 2.PROPERTIES As of December 31, 1998, the Partnership had an aggregate of 1,000 apartment units. A summary of the Partnership's multi-family real estate investments is presented below. Schedule III included in Item 8 (Appendix A) to this report contains additional detailed information with respect to individual properties. Average Occupancy For the Years Ended Year of December 31, DescriptionAcquisition Total Units 1998 1997 1996 1995 1994 Fenland Field Apartments 1983 234 99% 100% 98% 95% 94% Columbia, Maryland Pavillion Apartments 1983 350 96% 95% 95% 94% 93% Garland, Texas Walden Pond Apartments 1983 416 97% 98% 95% 93% 97% Houston, Texas 1,000 Units ITEM 3.LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or to which any of 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 of Limited Partner Interest 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 Investor Limited Partners as of December 31, 1998 was approximately 1,800. The Partnership made the following distributions to its Partners during the years ended December 31, 1998 and 1997: Year Ended December 31, 1998 1997 Amount Per Unit Amount Per Unit Limited Partners: Investor Limited Partners (30,000 Units outstanding) $2,853,592 $95.12 $1,119,903 $37.33 Original Limited Partner 35,369 47,158 General Partners 29,182 11,790 $2,918,143 $1,178,851 Due to improvements in the operations of the properties and the availability of cash flow, the General Partners reinstated distributions in August, 1994, at a rate of $4.67 per Unit. In 1995 and 1996, the annual distribution rates were increased to $28.00 and $37.33 per Unit, respectively. These semiannual distributions continued in 1997 and the first half of 1998 at an annualized rate of $37.33 per Unit. As a result of the sale of Indian Run Apartments, the General Partners reduced the distribution rate to $9.33 per Unit for the distribution paid in August, 1998. However, the General Partners increased the distribution rate to $24.69 per Unit beginning with the distribution payable in February, 1999 due to improved operations during the year. The Partnership made special capital distributions of $67.12 and $43.33 per Unit during the second quarter of 1998 and the second quarter of 1996, respectively, with the funds received from the sale of Indian Run Apartments in 1998 and the sale of Lakeview Tower Apartments in 1992, respectively. Pursuant to the Partnership Agreement, distributions from capital transactions, such as the sale of a property, are allocated 99% to Investor Limited Partners and 1% to the General Partners. For details, see Note G to Consolidated Financial Statements included in Item 8 (Appendix A) of this report. 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 of this report, respectively. 1998 1997 1996 1995 1994 Total revenue $ 7,169,243 $7,721,285 $7,307,643 $7,108,711$6,810,441 Income (loss) before gain on sale of property and extraordinary loss 574,090 157,116 (156,880) (21,628) (488,936) Gain on sale of property 2,960,743 - - - - Extraordinary loss (389,523) - - - - Net income (loss) 3,145,310 157,116 (156,880) (21,628) (488,936) Net income (loss) allocated to: Investor Limited Partners 3,090,894 149,260 (149,036) (20,547) (464,489) Per Unit 103.03 4.98 (4.97) (.68) (15.48) Original Limited Partner 22,964 6,285 (6,275) (865) (19,558) General Partners 31,452 1,571 (1,569) (216) (4,889) Total assets at December 31, 13,245,952 16,718,318 17,605,712 20,887,877 22,305,143 Long-term obligations at December 31, 10,552,809 19,544,471 19,429,196 20,193,607 20,939,499 Distributions: Investor Limited Partners 2,853,592 1,119,903 2,419,804 839,859 140,003 Per Unit 95.12 37.33 80.66 28.00 4.67 Original Limited Partner 35,369 47,158 47,158 35,362 5,895 General Partners 29,182 11,790 24,920 8,841 1,474 Operating results for the periods presented are not comparable due to the sale of Indian Run Apartments on March 31, 1998. The per Unit distributions for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 were $95.12, $37.33, $80.66, $28.00 and $4.67, respectively, of which $67.12, $0, $43.33, $0 and $0 represented a return of capital. 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 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. Cash Flow, if any, as calculated under Section 8.2(a) of the Partnership Agreement, will then be available for distribution to the Partners. The Partnership funded approximately $1,086,000 of capital improvements at the properties in 1998 for appliances, carpeting and other interior and exterior building improvements. The Partnership expects to spend approximately $661,000 for capital improvements in 1999 consisting of internal enhancements which include the replacement of appliances, carpeting and vinyl flooring at the properties as well as exterior improvements, including roofing, at Pavillion Apartments. The Partnership expects to fund these improvements from established reserves and the sale of Indian Run Apartments, as discussed below. On March 31, 1998, the Partnership sold Indian Run Apartments 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 $137,633. For further details, see Note D to the Consolidated Financial Statements included in Item 8 (Appendix A) of this report. Due to improvements in the operations of the properties and reduced debt service, the Partnership had sufficient cash flow in 1995 to increase the annual distribution rate to $28.00 per Unit and to $37.33 per Unit in 1996. As a result of the sale of Indian Run Apartments, the General Partners reduced the distribution rate to $9.33 per Unit for the distribution paid in August, 1998. However, the General Partners increased the distribution rate to $24.69 per Unit beginning with the distribution payable in February, 1999 due to improved operations during the year. The Partnership made special distributions of $2,034,000, $67.12 per Unit, and $1,313,031, $43.33 per Unit, during the second quarter of 1998 and the second quarter of 1996, respectively, based on the remaining proceeds from the sale of Indian Run Apartments in 1998 and Lakeview Tower Apartments in 1992, respectively. Distributions of net cash proceeds from capital transactions are allocated in accordance with the Partnership Agreement (as described in Note G to the Consolidated Financial Statements included in Item 8 (Appendix A) of this report). The General Partners, on an ongoing basis, assess the current and future liquidity needs in determining the levels of working capital reserves the Partnership should maintain. Adjustments to distributions are made when appropriate to reflect such assessments. On July 31, 1997, the General Partners obtained an additional $900,000 note for Walden Pond Apartments. The note bears interest at a rate of 9.5% per annum and matures on February 28, 1999, simultaneous with the first mortgage note. The proceeds from the note were placed in escrow and were used to fund capital improvements at the property. The Partnership paid closing costs of $33,082 to secure the note. (For further details, see Note E to Consolidated Financial Statements included in Item 8 (Appendix A) of this report.) Subsequent to year-end, on February 28, 1999, the General Partners refinanced the Walden Pond mortgage notes. For further details, see Note J to Consolidated Financial Statements included in Item 8 (Appendix A) of this report. 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. Financial Accounting Standards Board Statement No. 133 ("FAS 133") "Accounting for Derivatives" is effective for fiscal years beginning after June 15, 1999. FAS 133 establishes standards related to the accounting and disclosure requirements of derivative financial instruments. Emerging Issues Task Force ruling 97-11 ("EITF 97-11") entitled "Accounting For Real Estate Property Acquisitions", is effective March 19, 1998. EITF 97-11 provides that real estate companies must expense, as incurred, the internal costs of identifying and acquiring operating property. The General Partners believe that the implementation of FAS 131 and EITF 97-11 do not have a material impact on the Partnership's financial statements, nor will the implementation of FAS 133. The General Partners of the Partnership have conducted an assessment of the Partnership's core internal and external computer information systems and have taken the further necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. In this regard, the General Partners of the Partnership, along with certain affiliates, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The General Partners completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the General Partners have generated operating efficiencies and believe their financial accounting operating systems are Year 2000 ready. Costs incurred by the Partnership are not significant to date. There are no other systems or software that the Partnership is using at the present time. The General Partners of the Partnership are currently in the process of identifying, evaluating and remedying the Partnership's Year 2000 compliance issues with respect to its non-financial systems, such as computer controlled elevators, boilers, chillers or other miscellaneous systems. The General Partners are in the process of completing the Partnership's Year 2000 compliance initiatives at its properties. Based on their identification and assessment efforts to date, the General Partners believe that certain of the computer equipment and software the Partnership currently uses will require modification or replacement. However, the General Partners do not believe that the future efforts to achieve the Partnership's Year 2000 compliance initiatives will result in material cost to the Partnership or significantly interrupt services or operations. The General Partners are in the process of evaluating the potential adverse impact that could result from the failure of material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors to be Year 2000 ready. No estimate can be made at this time as to the impact of the readiness of such third parties. However, if any of the third party service providers cease to conduct business due to Year 2000 related problems, the General Partners expect to be able to contract with alternate providers without experiencing any material adverse effects on the Partnership's financial condition and results of operations. The Partnership is in the process of coordinating their contingency plan with the property manager, in charge of operations. Operations The following discussion relates to the operations of the Partnership and its properties (Fenland Field, Pavillion and Walden Pond Apartments) for the years ended December 31, 1998, 1997 and 1996. The sale of Indian Run Apartments in March, 1998, significantly impacts the comparability of the Partnership's operations among the three years. 1998 compared to 1997 Net income, net of Indian Run's activity, increased during 1998 when compared to 1997 with an increase in total revenue and a decrease in total expenses. The increase in total revenue is a result of rental rate increases implemented at all the Partnership's properties in 1998. Interest income also increased due to higher cash and cash equivalent balances available for investment. Total expenses in 1998, net of Indian Run's activity, decreased as compared to 1997, with decreases in operating and depreciation and amortization expenses, partially offset by a rise in real estate taxes and interest expense. Operating expense decreased as a result of a reduction in liability and workers compensation expense at the Partnership's properties, due to lower claims experience. Depreciation and amortization expense decreased as fixed asset additions purchased in previous years became fully depreciated. Real estate taxes increased due to an increase in the assessed values of the Partnership's properties. Interest expense increased as a result of the Walden Pond additional note. For further discussion of this note, see Note E to the Consolidated Financial Statements included in Item 8 (Appendix A) of this report. 1997 compared to 1996 Net income increased in 1997 as compared to 1996, as the increase in revenue more than offset the increase in expenses. Rental revenue increased as a result of rental rate increases implemented at all the Partnership's properties, as well as improved average occupancy rates at two properties in 1997 as compared to 1996. This increase was slightly offset by a decrease in other income due to lower average cash balances available for investment. Total expenses, including general and administrative, management fees and depreciation, increased in 1997 as compared to 1996. General and administrative expense increased as a result of legal, mailing and printing costs related to the Partnership's response to the unsolicited tender offers to purchase Partnership Units. In addition, expenses related to the preparation and mailing of Partnership reports and other investor communications increased. Management fees increased in conjunction with higher revenues, as discussed above. Depreciation expense increased as a result of continued capital improvements at all the Partnership's properties. These increases were partially offset by a decrease in maintenance expense as a result of extensive parking lot repairs and building exterior expenditures completed in 1996 at Indian Run and Pavillion Apartments. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Appendix A to this report. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Information as to the directors and executive officers of The Krupp Corporation, which is a General Partner of both KRLP-IV and The Krupp Company Limited Partnership-II, the other General Partner of KRLP-IV, is as follows: Position with Name and Age The Krupp Corporation Douglas Krupp (52) President and Co-Chairman of the Board George Krupp (54) Co-Chairman of the Board Wayne H. Zarozny (40) Treasurer 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 acquisition, mortgage banking, investment sponsorship, venture capital investing and financial management. 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. Mr. Krupp serves as Chairman of the Board and Director of Berkshire Realty Company, Inc. (NYSE-BRI) and he is also a member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989 and was elected trustee in 1990. George Krupp is the Co-Founder and Co- Chairman of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisition, mortgage banking, investment sponsorship, venture capital investing and financial management. 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. Wayne H. Zarozny is Vice President of The Berkshire Group. Mr. Zarozny has held several positions within The Berkshire Group since joining the company in 1986 and is currently responsible for asset management, accounting, financial reporting and treasury activities. Prior to joining The Berkshire Group, he was an audit supervisor for Pannell Kerr Forster International and on the audit staff of Deloitte, Haskins and Sells in Boston. He received a B.S. degree from Bryant College, a Master's degree in Business Administration from Clark University 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, 1998, beneficial owners of record owning more than 5% of the Partnership's 30,000 outstanding Units were as follows: Title Name and Address Amount and Nature Percent of of of of Class Beneficial Owner Beneficial Ownership Class Investor Equity Resource Fund Limited XVII LP Partner 14 Story Street Units Cambridge, MA 02138 394.5 Units 3.0% Investor Equity Resource Fund Limited XVI LP Partner 14 Story Street Units Cambridge, MA 02138 419 Units 1.4% Investor Equity Resource Fund Limited XIX LP Partner 14 Story Street Units Cambridge, MA 02138 211 Units 0.7% Investor Equity Resource Limited Cambridge Fund LP Partner 14 Story Street Units Cambridge, MA 02138 160 Units 0.5% Investor Equity Resource Limited General Fund LP Partner 14 Story Street Units Cambridge, MA 02138 20 Units 0.1% Total 1,704.50 Units 5.7% The only interests held by management or its affiliates consist of its General Partner and Original Limited Partner Interests. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership does not have any directors, executive officers or nominees for election as director. 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 and Schedule included under Item 8 (Appendix A), on page F-2 of this Report. 2. Consolidated Financial Statement Schedule - see Index to Consolidated 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 or 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 under Item 601 of Regulation S-K: (4) Instruments defining the rights of security holders including indentures: (4.1) Amended Agreement of Limited Partnership dated as of January 12, 1983 [Exhibit A to Prospectus included in Registrant's Registration Statement on Form S-11 (File 2-80650)].* (4.2) Amended Certificate of Limited Partnership filed with the Massachusetts Secretary of State on March 31, 1983 [Exhibit 4.2 to Registrant's Annual Report on Form 10-K dated December 31, 1983 (File No. 2-80650)].* (10) Material Contracts Fenland Field Apartments (10.1) Management Agreement dated December 19, 1986 between Krupp Realty Limited Partnership-IV, as Owner, and BRI OP Limited Partnership, formerly known as Berkshire Property Management, a subsidiary of Berkshire Realty Company, Inc. [Exhibit 10.3 to Registrant's Annual Report on Form 10-K dated December 31, 1986 (File No. 0-11987)].* (10.2) Modification and Restatement of Promissory Note dated April 28, 1993 between Krupp Realty Limited Partnership-IV and John Hancock Mutual Life Insurance Company [Exhibit 10.2 to Registrant's Annual Report on Form 10-K dated December 31, 1993 (File No. 0-11987)].* (10.3) Modification and Restatement of Indemnity Deed of Trust and Security Agreement dated April 28, 1993 between Krupp Realty Limited Partnership-IV and John Hancock Mutual Life Insurance Company [Exhibit 10.3 to Registrant's Annual Report on Form 10-K dated December 31, 1993 (File No. 0-11987)].* Walden Pond Apartments (10.4) Management Agreement dated June 2, 1983 between Krupp Realty Limited Partnership-IV, as Owner, and BRI OP Limited Partnership, formerly known as Berkshire Property Management, a subsidiary of Berkshire Realty Company, Inc. [Exhibit 10.19 to Registrant's Annual Report on Form 10-K dated December 31, 1983 (File No. 2-80650)].* (10.5) Certificate of Limited Partnership of Westbridge Partners, Ltd., executed March 1, 1990. [Exhibit 19.9 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.6) Westbridge Partners, Ltd. Agreement of Limited Partnership executed March 1, 1990. [Exhibit 20.1 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.7) Bill of Sale Agreement between Krupp Realty Limited Partnership-IV and Westbridge Partners, Ltd., executed March 1, 1990. [Exhibit 20.2 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.8) Westbridge Partners, Ltd. First Amendment to Agreement of Limited Partnership, executed April 9, 1990. [Exhibit 20.3 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.9) Order Granting Motion of First Boston Mortgage Capital Corp. for Relief from the Automatic Stay dated January 28, 1992. [Exhibit C to Registrant's Report on Form 8-K dated March 3, 1992 (File No. 0- 11987)].* (10.10) Modification Agreement dated February 28, 1992 between Westbridge Partners, Ltd. and University Mortgage Acquisition Corp. [Exhibit 10.14 to Registrant's Annual Report on Form 10-K dated December 31, 1993 (File No. 0-11987)].* (10.11) Renewal Multifamily Note dated February 28, 1992 between Westbridge Partners, Ltd. and University Mortgage Acquisition Corp. [Exhibit 10.15 to Registrant's Annual Report on Form 10-K dated December 31, 1993 (File No. 0-11987)].* (10.12) Renewal Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated February 28, 1992 by Westbridge Partners, Ltd. and John M. Walker, Jr., as Trustee, and University Mortgage Acquisition Corp. [Exhibit 10.16 to Registrant's Annual Report on Form 10-K dated December 31, 1993 (File No. 0-11987)].* Pavillion Apartments (10.13) Management Agreement dated June 2, 1983 between Krupp Realty Limited Partnership-IV, as Owner, and BRI OP Limited Partnership, formerly known as Berkshire Property Management, a subsidiary of Berkshire Realty Company, Inc. [Exhibit 10.25 to Registrant's Annual Report on Form 10-K dated December 31, 1983 (File No. 2-80650)].* (10.14) Certificate of Limited Partnership of Pavillion Partners, Ltd., executed March 1, 1990. [Exhibit 19.1 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.15) Pavillion Partners, Ltd. Agreement of Limited Partnership executed March 1, 1990. [Exhibit 19.2 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.16) Bill of Sale Agreement between Krupp Realty Limited Partnership-IV and Pavillion Partners, Ltd., executed March 1, 1990. [Exhibit 19.3 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.17) Pavillion Partners, Ltd. First Amendment to Agreement of Limited Partnership, executed April 9, 1990. [Exhibit 19.4 to Registrant's Report on Form 10-Q dated June 30, 1990 (File No. 0-11987)].* (10.18) Pavillion Partners, Ltd. Chapter 11 Voluntary Petition executed June 4, 1990 in The United States Bankruptcy Court for the Northern District of Texas, Dallas Division. [Exhibit 10.51 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 0-11987)].* (10.19) Pavillion Partners, Ltd., Debtor's First Amended Plan of Reorganization executed January 16, 1991 in The United States Bankruptcy Court for the Northern District of Texas, Dallas Division. [Exhibit 10.52 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 0-11987)].* (10.20) Promissory Note dated April 13, 1994 by and between Pavillion Partners, Ltd. and Sunlife Insurance Company of America. [Exhibit 10.1 to Registrant's Report on Form 10-Q dated June 30, 1994 (File No. 0-11987)].* (10.21) Deed of Trust and Security Agreement dated April 13, 1994 between Pavillion Partners, Ltd. and Sunlife Insurance Company of America. [Exhibit 10.2 to Registrant's Report on Form 10-Q dated June 30, 1994 (File No. 0-11987)].* * Incorporated by reference. (c) Reports on Form 8-K During the last quarter of the year ended December 31, 1998 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 30th day of March, 1999. KRUPP REALTY LIMITED PARTNERSHIP-IV By: The Krupp Corporation, a General Partner By: /s/ Douglas Krupp Douglas Krupp, President, 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 30th day of March, 1999. Signatures Titles /s/ Douglas Krupp President, Co-Chairman (Principal Douglas Krupp Executive Officer) and Director of The Krupp Corporation, a General Partner. /s/ George Krupp Co-Chairman (Principal Executive George Krupp Officer) and Director of The Krupp Corporation, a General Partner. /s/ Wayne H. Zarozny Treasurer of the Krupp Corporation, Wayne H. Zarozny a General Partner. APPENDIX A KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES 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, 1998 KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Accountants F-3 Consolidated Balance Sheets at December 31, 1998 and December 31, 1997 F-4 Consolidated Statements of Operations For the Years Ended December 31, 1998, 1997 and 1996 F-5 - F-6 Consolidated Statements of Changes in Partners' Deficit For the Years Ended December 31, 1998, 1997 and 1996 F-7 Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 F-8 Notes to Consolidated Financial Statements F-9 - F-17 Schedule III - Real Estate and Accumulated DepreciationF-18 - F-19 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 Realty Limited Partnership-IV and Subsidiaries: In our opinion, the consolidated financial statements and the financial statement schedule listed in the index on page F-2 present fairly, in all material respects, the financial position of Krupp Realty Limited Partnership-IV and Subsidiaries (the "Partnership") at December 31, 1998 and December 31, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards, 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 the opinion expressed above. Boston, Massachusetts /s/ PricewaterhouseCoopers LLP February 10, 1999 KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 Multi-family apartment complexes, net of accumulated depreciation of $23,263,961 and $26,859,567, respectively (Notes D and E) $11,585,489 $14,947,503 Cash and cash equivalents (Note C) 774,230 402,621 Replacement reserve and repair escrows (Note E) - 302,985 Prepaid expenses and other assets 795,705 852,446 Deferred expenses, net of accumulated amortization of $256,510 and $218,977, respectively 90,528 212,763 Total assets $13,245,952 $16,718,318 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable (Note E) $16,933,049 $20,327,586 Due to affiliates (Note H) 10,734 41,571 Other liabilities (Note F) 938,569 1,212,728 Total liabilities 17,882,352 21,581,885 Partners' deficit (Note G): Investor Limited Partners (30,000 Units outstanding) (2,979,654) (3,216,956) Original Limited Partner (1,351,830) (1,339,425) General Partners (304,916) (307,186) Total Partners' deficit (4,636,400) (4,863,567) Total liabilities and Partners' deficit$13,245,952$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 For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Revenue: Rental $ 7,066,401 $ 7,667,293$ 7,195,526 Other income (Note C) 102,842 53,992 112,117 Total revenue 7,169,243 7,721,285 7,307,643 Expenses: Operating (Note H) 1,916,491 2,169,020 2,204,240 Maintenance 606,271 677,491 722,959 Real estate taxes 724,018 759,158 743,584 Management fees (Note H) 287,049 308,841 269,428 General and administrative (Note H)138,201 153,734 120,653 Depreciation and amortization 1,762,642 2,179,399 2,106,590 Interest (Note E) 1,154,453 1,312,291 1,294,247 Total expenses 6,589,125 7,559,934 7,461,701 Income (loss) before minority interest, gain on sale of property and extraordinary loss 580,118 161,351 (154,058) Minority interest (6,028) (4,235) (2,822) Gain on sale of property (Note D) 2,960,743 - - Income (loss) before extraordinary loss 3,534,833 157,116 (156,880) Extraordinary loss from early extinguishment of debt (Note D) (389,523) - - Net income (loss) (Note I) $ 3,145,310 $ 157,116$ (156,880) Allocation of net income (loss) (Note G): Investor Limited Partners (30,000 Units outstanding): Income (loss) before gain on sale of property and extraordinary loss $ 545,386 $ 149,260$ (149,036) Gain on sale of property 2,931,136 - - Extraordinary loss (385,628) - - Net income (loss) $ 3,090,894 $ 149,260$ (149,036) Investor Limited Partners Per Unit: Income (loss) before gain on sale of property and extraordinary loss $ 18.18 $ 4.98$ (4.97) Gain on sale of property 97.70 - - Extraordinary loss (12.85) - - Net income (loss) $ 103.03 $ 4.98 $ (4.97) Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS, Continued For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Original Limited Partner (100 Units outstanding): Income (loss) before gain on sale of property and extraordinary loss $ 22,964 $ 6,285$ (6,275) Gain on sale of property - - - Extraordinary loss - - - Net income (loss) $ 22,964 $ 6,285$ (6,275) General Partners: Income (loss) before gain on sale of property and extraordinary loss $ 5,740 $ 1,571$ (1,569) Gain on sale of property 29,607 - - Extraordinary loss (3,895) - - Net income (loss) $ 31,452 $ 1,571$ (1,569) The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT For the Years Ended December 31, 1998, 1997 and 1996 Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1995$ 322,527 $(1,245,119)$ (270,478) $(1,193,070) Distributions (2,419,804) (47,158) (24,920) (2,491,882) Net loss (149,036) (6,275) (1,569) (156,880) Balance at December 31, 1996(2,246,313) (1,298,552) (296,967) (3,841,832) Distributions (1,119,903) (47,158) (11,790) (1,178,851) Net income 149,260 6,285 1,571 157,116 Balance at December 31, 1997(3,216,956)(1,339,425) (307,186) (4,863,567) Distributions (Note G) (2,853,592) (35,369) (29,182) (2,918,143) Net income (Note G) 3,090,894 22,964 31,452 3,145,310 Balance at December 31, 1998$ (2,979,654)$(1,351,830)$ (304,916)$(4,636,400) The per Unit distributions for the years ended December 31, 1998, 1997 and 1996 were $95.12, $37.33 and $80.66, respectively, of which $67.12, $0 and $43.33 represented a return of capital, respectively. The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Cash flows from operating activities: Net income (loss) $ 3,145,310 $ 157,116$ (156,880) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,762,642 2,179,399 2,106,590 Interest earned on repair escrow(12,898) - - Gain on sale of property (2,960,743) - - Extraordinary loss from early extinguishment of debt 389,523 - - Changes in assets and liabilities: Decrease (increase) in prepaid expenses and other assets 23,019 (42,867) (127,399) Increase (decrease) in other liabilities (276,153) (3,997) 171,778 Increase (decrease) in due to affiliates (30,837) 9,179 (65,448) Releases from real estate tax and insurance escrows due to sale of property 33,722 - - Net cash provided by operating activities 2,073,585 2,298,830 1,928,641 Cash flows from investing activities: Deposits to replacement reserve and repair escrows (10,769) (962,861) (62,861) Withdrawals from replacement reserve and repair escrows 315,159 691,827 49,976 Release from replacement reserve escrow due to sale of property 11,493 - - Additions to fixed assets (1,085,983) (1,498,413) (530,823) Increase (decrease) in other liabilities for fixed asset additions 1,994 (6,289) 6,289 Proceeds from sale of property, net 5,711,482 - - Net cash provided by (used in) investing activities4,943,376 (1,775,736) (537,419) Cash flows from financing activities: Proceeds from note payable - 900,000 - Principal payments on mortgage notes payable (756,495) (764,552) (746,022) Repayment of mortgage note payable (2,638,042) - - Decrease (increase) in deferred expenses 3,191 (33,082) - Payment of prepayment premium (335,863) - - Distributions (2,918,143) (1,178,851) (2,491,882) Net cash used in financing activities (6,645,352) (1,076,485) (3,237,904) Net increase (decrease) in cash and cash equivalents 371,609 (553,391) (1,846,682) Cash and cash equivalents, beginning of year 402,621 956,012 2,802,694 Cash and cash equivalents, end of year$ 774,230$ 402,621$ 956,012 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A.Organization Krupp Realty Limited Partnership-IV ("KRLP- IV") was formed on December 1, 1982 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. KRLP-IV terminates on December 31, 2020, unless earlier terminated upon the sale of the last of KRLP-IV and Subsidiaries' properties or the occurrence of certain other events as set forth in the Partnership Agreement. KRLP-IV issued all of the General Partner Interests to The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership-II, a Massachusetts limited partnership, in exchange for capital contributions aggregating $1,000. Except under certain limited circumstances upon termination of KRLP-IV, the General Partners are not required to make any additional capital contributions. KRLP-IV also issued all of the Original Limited Partner Interests to The Krupp Company Limited Partnership-II in exchange for a capital contribution of $4,000. The Original Limited Partner is not required to make any additional capital contributions to KRLP-IV. On January 18, 1983, KRLP-IV commenced the offering of up to 30,000 Units of Investor Limited Partner Interests (the "Units"). As of March 31, 1983, KRLP-IV received subscriptions for all 30,000 Units at $1,000 per Unit and therefore, the public offering was successfully completed on that date. In 1990, the General Partners on behalf of KRLP-IV formed three limited partnerships: Pavillion Partners, Ltd., Copper Creek Partners, Ltd. and Westbridge Partners, Ltd. At the same time, the General Partners transferred ownership of Pavillion Apartments to Pavillion Partners, Ltd., Copper Creek Apartments to Copper Creek Partners, Ltd., and Walden Pond Apartments to Westbridge Partners, Ltd. in exchange for KRLP-IV's 99% Limited Partner Interest in the new entities. Westcop Corporation, an affiliate of the General Partners, contributed a total of $11,216 in cash to the entities and is the General Partner in each, with a 1% interest. On March 3, 1992, Copper Creek was foreclosed upon by the holder of the first and second mortgage notes pursuant to an agreement approved by the Bankruptcy Court. KRLP-IV, Pavillion Partners, Ltd., and Westbridge Partners, Ltd. are collectively known as Krupp Realty Limited Partnership-IV and Subsidiaries (collectively the "Partnership"). As of December 31, 1998, the Partnership owned three multi-family apartment complexes. 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 (see Note I). Basis of Presentation The consolidated financial statements present the consolidated assets, liabilities and operations of Pavillion Partners, Ltd., Westbridge Partners, Ltd. and KRLP-IV (see Note A). All intercompany balances and transactions have been eliminated. At December 31, 1998 and 1997, minority interest of $15,709 and $21,736, respectively, was included in other assets. 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. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued B.Significant Accounting Policies, Continued Risks and Uncertainties, Continued 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. Impairment of Long-Lived Assets Real estate assets and equipment are stated at depreciated cost. Pursuant to Statement of Financial Accounting Standards Opinion No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of', impairment losses are recorded on long-lived assets used in operations on a property by property basis, when events and circumstances indicate that the assets might be impaired and the estimated undiscounted cash flows to be generated by those assets are less than the carrying amount of those assets. Upon determination that an impairment has occurred, those assets shall be reduced to fair value. Depreciation Depreciation is provided for by the use of the straight-line method over estimated useful lives of the related assets as follows: Buildings and improvements 3 to 25 years Appliances, carpeting and equipment3 to 8 years Deferred Expenses Costs of obtaining and recording mortgages on the properties are amortized over the term of the related mortgage notes using the straight- line method which approximates the effective interest method. Income Taxes The Partnership is not liable for federal or state income taxes as 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 Partnership taxable income or loss, such change will be reported to the Partners. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued B.Significant Accounting Policies, Continued Descriptive Information About Reportable Segments During the fourth quarter of 1998, the Partnership adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise". Statement No. 131 establishes standards for the way that public business enterprises report information regarding reportable operating segments. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Partnership. The Partnership operates and develops apartment communities which generate rental and other income through the leasing of apartment units. The General Partners separately evaluate the performance of each of the Partnership's apartment communities. However, because each of the apartment communities have similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single dominant apartment communities segment. All revenues are from external customers and no revenues are generated from transactions with other segments. There are no tenants which contributed 10% or more of the Partnership's total revenue during 1998, 1997 or 1996. Reclassifications Certain prior year balances have been reclassified to conform with current year consolidated financial statement presentation. C.Cash and Cash Equivalents Cash and cash equivalents consisted of the following: December 31, December 31, 1998 1997 Cash and money market accounts$ 774,230 $ 402,621 Commercial paper - - $ 774,230 $ 402,621 D.Sale of Indian Run Apartments 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 $138,518. For financial reporting purposes, the Partnership realized a gain of $2,960,743 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. 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 $53,660, are reported in the Consolidated Statement of Operations as an extraordinary loss from early extinguishment of debt. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued E.Mortgage Notes Payable The properties owned by the Partnership are pledged as collateral for the respective non- recourse mortgage notes payable outstanding at December 31, 1998 and 1997. Mortgage notes payable consisted of the following: Principal Annual Interest Property 1998 1997 Rate Maturity Date Fenland Field Apartments$ 4,014,512$ 4,142,659 9.25% June 1, 2000 Indian Run Apartments - 2,647,719 9.51% - Walden Pond Apartments 6,171,477 6,726,440 see below February 28, 1999 Pavillion Apartments 6,747,060 6,810,768 9.25%May 1,2001 Total $16,933,049 $20,327,586 Fenland Field Apartments The property is subject to a non-recourse mortgage note payable, based on a 20-year amortization, in equal monthly installments of principal and interest of $42,167. At maturity, all unpaid principal ($3,824,206) and any accrued and unpaid interest are due. The note may be prepaid subject to certain prepayment premiums. The mortgage note is collateralized by the property. 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 $4,157,000 at December 31, 1998. At December 31, 1997, the fair market value could not be determined since the mortgage note could not be prepaid until 1998. Indian Run Apartments 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 Consolidated Statement of Operations as an extraordinary loss from early extinguishment of debt (see Note D). Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued E. Mortgage Notes Payable, Continued Walden Pond Apartments On February 28, 1992, the prior wrap- around mortgage note was modified in bankruptcy court. The modified first mortgage note with a principal balance of $5,500,000, which has a stated rate of 9.5%, is being amortized over a 30-year period and requires monthly payments of $46,247. For financial reporting purposes, generally accepted accounting principles required the Partnership to reduce the outstanding principal balance of the mortgage to the sum of the future cash flow payments required under the terms of the mortgage, including a final payment on February 28, 1999 of approximately $5,200,000. All cash payments made subsequent to the restructure are recorded as a reduction of the principal balance with no interest expense recognized by the Partnership. The note may be prepaid at any time, subject to certain prepayment premiums. On July 31, 1997, the General Partners obtained a $900,000 non-recourse note (the "Note") for Walden Pond Apartments from the same lender that 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, simultaneous with the first mortgage note, at which time all outstanding principal and any accrued interest are 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 will be used to fund capital improvements at the property. The Partnership paid closing costs of $33,082 to obtain the Note. On February 28, 1999 the General Partners refinanced the mortgage notes payable of $5,500,000 and $900,000 (see Note J). 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 $5,234,000 and $6,300,000 at December 31, 1998 and 1997, respectively. Pavillion Apartments The property is subject to a non-recourse mortgage note payable, based on a 30-year amortization, in equal monthly installments of principal and interest of $57,587. At maturity, all unpaid principal ($6,580,326) and any accrued and unpaid interest are due. The note may be prepaid at any time, subject to certain prepayment premiums. 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 $7,109,000 and $7,200,000 at December 31, 1998 and 1997, respectively. Due to restrictions on transfers and prepayment, the Partnership may be unable to refinance certain mortgage notes payable at such calculated fair value. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued E. Mortgage Notes Payable, Continued The aggregate scheduled principal amounts of long-term borrowings due during the five years ending December 31, 2003 are $6,380,240, $3,962,221, $6,607,261, $0 and $0, respectively. The Partnership paid interest on its mortgage notes of $1,154,453, $1,304,929 and 1,294,247 during the years ended December 31, 1998, 1997 and 1996, respectively. F. Other Liabilities Other liabilities consisted of the following at December 31, 1998 and 1997: 1998 1997 Accounts payable $ 2,802 $ - Accrued real estate taxes 521,196 616,682 Other liabilities 258,203 443,491 Tenant security deposits 156,368 152,555 $938,569 $1,212,728 G.Partners' Deficit Under the terms of the Partnership Agreement, profits and losses from operations are allocated 95% to the Investor Limited Partners, 4% to the Original Limited Partner and 1% to the General Partners until such time that the Investor Limited Partners have received a return of their total invested capital plus a 9% per annum cumulative return thereon. Thereafter, profits and losses will be allocated 65% to the Investor Limited Partners, 28% to the Original Limited Partner and 7% to the General Partners. In accordance with the Partnership Agreement, distributions are generally made on the same basis as the allocations of profits and losses described above. Upon the occurrence of a capital transaction, as defined in the Partnership Agreement, proceeds will be applied to the payment of all debts and liabilities of the Partnership then due and then fund any reserves for contingent liabilities. Remaining net cash proceeds will then be distributed 99% to the Investor Limited Partners until they have received a return of their total invested capital and 1% to the General Partners, thereafter net cash proceeds will be distributed in accordance with the Partnership Agreement. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued G.Partners' Deficit, Continued As of December 31, 1998, the following cumulative partner contributions and allocations have been made since inception of KRLP-IV: Investor Original Limited Limited General Partners Partner Partners Total Capital contributions$ 30,000,000 $ 4,000 $ 1,000 $ 30,005,000 Syndication costs (4,050,000) - - (4,050,000) Cash distributions: Operations (7,974,048) (335,762) (83,938) (8,393,748) Capital transactions (5,313,560) - (53,673) (5,367,233) Income (loss): Operations (27,465,138)(1,317,990) (290,740)(29,073,868) Capital transactions11,823,092 297,922 122,435 12,243,449 Balance at December 31, 1998$(2,979,654)$(1,351,830)$(304,916)$ (4,636,400) H.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 for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 Property management fees $287,049 $308,841 $269,428 Expense reimbursements 275,788 268,443 256,144 Charged to operations $562,837 $577,284 $525,572 Due to affiliates consisted of expense reimbursements of $10,734 and $41,571 at December 31, 1998 and 1997, respectively. I.Federal Income Taxes For federal income tax purposes, the Partnership is depreciating property using the Accelerated Cost Recovery System ("ACRS") and the Modified Accelerated Cost Recovery System ("MACRS") depending on which is applicable. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued I.Federal Income Taxes, Continued The reconciliation of the net income (loss) for each year reported in the accompanying Consolidated Statement of Operations with the net loss reported in the Partnership's federal income tax return for the years ended December 31, 1998, 1997 and 1996 is as follows: 1998 1997 1996 Net income (loss) per Consolidated Statement of Operations $3,145,310 $ 157,116 $ (156,880) Difference in book to tax depreciation for Fenland Field and Indian Run 200,671 59,156 90,299 Difference in Partnership's share of Pavillion Partners net loss for tax purposes 172,490 17,560 31,598 Difference in Partnership's share of Westbridge Partners net income for tax purposes (128,156) (401,876) (468,815) Difference between book and tax gain on sale of property 1,742,577 - - Net income (loss) for federal income tax purposes $5,132,892 $(168,044) $ (503,798) The allocation of the net income for federal income tax purposes for 1998 is as follows: Portfolio Passive Income Income Total Investor Limited Partners $ 95,183 $4,969,485 $ 5,064,668 Original Limited Partner 4,008 12,887 16,895 General Partners 1,002 50,327 51,329 $ 100,193 $5,032,699 $ 5,132,892 During the years ended December 31, 1998, 1997 and 1996 the per Unit net income (loss) to the Investor Limited Partners for federal income tax purposes was $168.82, $(5.32) and $(15.95), respectively. The basis of the Partnership's assets for financial reporting purposes exceeded its tax basis by approximately $3,789,000 and $6,036,000 at December 31, 1998 and 1997, respectively. The basis of the Partnership's liabilities for financial reporting purposes is less than its tax basis by approximately $7,580,000 and $7,966,000 at December 31, 1998 and 1997, respectively. Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued J.Subsequent Event Subsequent to year-end on February 28, 1999, the Partnership refinanced the Walden Pond mortgage notes of $5,500,000 and $900,000 with monthly principal payments of $6,500 and $1,100, respectively, and interest payments at the Contract rate of interest equal to the greater of (a) 0.5% per annum in excess of the prime rate, or (b) 8% per annum. The notes mature on February 28, 2001. KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Costs Capitalized Subsequent to Initial Cost to Partnership Acquisition Buildings & Buildings & Depreciable DescriptionEncumbrances Land Improvements Land Improvements Life Fenland Field Apartments Columbia, MD $ 4,014,512$365,262 $ 4,852,767 $407 $2,612,2043 to 25 Years Walden Pond Apts. Houston, TX (a) 6,084,188 906,253 12,040,217 1,211 2,534,230 3 to 25 Years Pavillion Apts. Garland, TX 6,747,060 680,621 9,042,535 1,199 1,812,544 3 to 25 Years Total $ 16,845,760 $1,952,136 $25,935,519 $2,817 $6,958,978 Gross Amounts Carried at End of Year Description Land Buildings and Improvements TotalAccumulated Depreciation Year Year Acquired Construction Completed Fenland Field Apartments Columbia, MD$365,669$7,464,971$7,830,640$5,548,266 1970 1983 Walden PondApts. Houston,TX 907,464 14,574,447 15,481,911 10,141,397 1982 1983 Pavillion Apts.Garland, TX 681,820 10,855,079 11,536,899 7,574,298 19831983 Total$1,954,953 $32,894,49 7$34,849,450 $23,263,961(a) The mortgage note payable balance per the Consolidated Balance Sheets includes all interest payable through maturity (see Note E). Continued KRUPP REALTY LIMITED PARTNERSHIP-IV AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION, Continued December 31, 1998 Reconciliation of Real Estate and Accumulated Depreciation for each of the three years in the period ended December 31, 1998: 1998 1997 1996 Real Estate Balance at beginning of year $41,807,070 $ 40,308,657 $ 39,777,834 Acquisition and improvements 1,085,983 1,498,413 530,823 Sale of property (8,043,603) - - Balance at end of year $ 34,849,450 $ 41,807,070$ 40,308,657 1998 1997 1996 Accumulated Depreciation Balance at beginning of year $ 26,859,567$ 24,742,332 $ 22,689,200 Depreciation expense 1,697,258 2,117,235 2,053,132 Sale of property (5,292,864) - - Balance at end of year$ 23,263,961$ 26,859,567 $ 24,742,332 The Partnership uses the cost basis for property valuation for both income tax and financial statement purposes. The aggregate cost of the Partnership's real estate for federal income tax purposes at December 31, 1998 is $34,854,403 and the aggregate accumulated depreciation for federal income tax purposes is $28,753,290.