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 SECURITIESx EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 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 0-15815 Krupp Insured Plus Limited Partnership (Exact name of registrant as specified in its charter) Massachusetts 04-2915281 (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 Depositary Receipts representing 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: See Part IV Item 14. The exhibit index is located on pages 8-11. PART I This Form 10-K contains forward-looking statements within the meaning of section 27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward looking statements as a result of a number of factors, including those identified herein. ITEM 1. BUSINESS On December 20, 1985, The Krupp Corporation and The Krupp Company Limited Partnership-IV (the "General Partners") formed Krupp Insured Plus Limited Partnership (the "Partnership"), a Massachusetts Limited Partnership. The Partnership raised approximately $149 million through a public offering of limited partner interests evidenced by units of depositary receipts ("Units") and used the net proceeds primarily to acquire participating insured mortgages ("PIMs") and mortgage backed securities ("MBS"). The Partnership considers itself to be engaged in the industry segment of investment in mortgages. The Partnership's investments in PIMs consist of a securitized multi- family first mortgage loan or a sole participation interest in a Department of Housing and Urban Development ("HUD") multi-family insured first mortgage loan, and participation interests in the current revenue stream of the mortgaged property and any increase in the mortgaged property's value above certain specified base levels. The Partnership provided the funds for the first mortgage loan made to the borrower by acquiring either a securitized first mortgage loan ("MBS"), originated under the lending programs of the Federal National Mortgage Association ("FNMA") or Government National Mortgage Association ("GNMA"), or a sole participation interest in a first mortgage loan originated under the Federal Housing Administration ("FHA") lending program (collectively the "insured mortgages"). The Partnership receives the participation interests in the mortgaged property as additional consideration for providing the funds for the first mortgage loan and accepting a below market interest rate on the insured mortgage. The borrower conveyed the participation interests to the Partnership through either a subordinated promissory note and mortgage or a shared income and appreciation agreement. FNMA guarantees the principal and interest payments for the FNMA MBS and GNMA guarantees the timely payment of principal and interest for the GNMA MBS. HUD insures the first mortgage loan underlying the GNMA MBS and any first mortgage loan originated under the FHA lending program. The participation interests conveyed to the Partnership by the borrower are neither insured nor guaranteed. The Partnership also acquired MBS backed by single-family or multi- family mortgage loans issued or originated by GNMA, FNMA or the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA and FHLMC guarantee the principal and basic interest of these FNMA and FHLMC MBS, respectively. GNMA guarantees the timely payment of principal and interest of GNMA MBS, and HUD insures the pooled first mortgage loans underlying the GNMA MBS. Although the Partnership will terminate no later than December 31, 2025 the Partnership anticipates realizing the value of the PIMs through repayment well before this date. Therefore, dissolution of the Partnership should occur significantly prior to December 31, 2025, the stated termination date of the Partnership. The Partnership's investments are not subject to seasonal fluctuations. However, the realization of the participation features of the PIMs are subject to similar risks associated with equity real estate investments, including: reliance on the owner's operating skills, ability to maintain occupancy levels, control operating expenses, maintain the property and provide adequate insurance coverage; adverse changes in general economic conditions, adverse local conditions, and changes in governmental regulations, real estate zoning laws, or tax laws; and other circumstances over which the Partnership may have little or no control. The requirements for compliance with federal, state and local regulations to date have not adversely effected the Partnership's operations and the Partnership does not presently anticipate adverse effects in the future. As of December 31, 1997, there were no personnel directly employed by the Partnership. ITEM 2. PROPERTIES None. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or to which any of its investments is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK- HOLDER MATTERS There currently is no established trading market for the Units. The number of investors holding Units as of December 31, 1997 was approximately 6,820. One of the objectives of the Partnership is to provide quarterly distributions of cash flow generated by its investments in mortgages. The Partnership presently anticipates that future operations will continue to generate cash available for distribution. Adjustments may be made to the distribution rate in the future due to the realization and payout of the existing mortgages. During 1997 and 1996, the Partnership made special distributions consisting primarily of principal proceeds from the Pine Hills PIM and Mandalay PIM prepayments, respectively. The Partnership may make special distributions in the future if PIMs prepay or a sufficient amount if cash is available from MBS and PIM principal collections. The Partnership made the following distributions, in quarterly installments, and special distributions, to its Partners during the two years ended December 31, 1997 and 1996: 1997 1996 Amount Per Unit Amount Per Unit Distributions: Limited Partners $ 5,700,093 $ .76 $ 9,000,119 $1.20 General Partners 172,798 181,178 5,872,891 9,181,297 Special Distributions: Limited Partners 4,575,060 $ .61 16,500,218 $2.20 Total Distributions $10,447,951 $25,681,515 -5- ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Supplementary Data, which are included in Item 7 and Item 8, (Appendix A) of this report, respectively. 1997 1996 1995 1994 1993 Total revenues $ 6,078,663 $ 7,216,716 $ 7,097,154 $ 7,688,593 $7,698,364 Net income 4,743,768 5,329,348 5,247,543 5,682,819 5,642,527 Net income allocated to: Limited Partners 4,601,455 5,169,468 5,090,117 5,512,334 5,473,251 Average Per Unit .61 .69 .68 .73 .73 General Partners 142,313 159,880 157,426 170,485 169,276 Total assets at December 31 67,795,436 73,273,523 93,784,033 96,561,305 108,566,470 Distributions to: Limited Partners 5,700,093 9,000,119 9,000,119 9,554,686 9,873,378 Average per Unit .76 1.20 1.20 1.28 1.32 Special 4,575,060 16,500,218 - 7,950,105 4,950,065 Average per Unit .61 2.20 - 1.06 .66 General Partners 172,798 181,178 187,157 192,551 203,481 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. -6- Liquidity and Capital Resources The most significant demands on the Partnership's liquidity are regular quarterly distributions of approximately $1.4 million paid to investors. Funds used for investor distributions come from (i)interest received on the PIMs, MBS, cash and cash equivalents, (ii) the principal collections received on the PIMs and MBS and (iii) cash reserves. The portion of the distribution funded from principal collections and cash reserves causes the capital resources of the Partnership to continually decrease. As a result of this decrease, the total cash inflows to the Partnership also will decrease resulting in periodic downward adjustments to the quarterly distributions paid to investors. During the fourth quarter of 1997, the Partnership received a repayment of the Pine Hills Apartments PIM. The Partnership received the outstanding principal balance of approximately $4.5 million, Shared Appreciation Interest of $252,000 and participation income of $290,390. The Partnership made a special distribution during December 1997 to the investors in the amount of $.61 per limited partner interest with these proceeds. The Partnership will continue to pay the current distribution rate for the near future. In November 1996, the underlying borrower of the Mandalay Apartments PIM prepaid the insured mortgage and paid a portion of the accumulated participation income. Following the prepayment, the Partnership made a special distribution of $2.20 per Unit to investors. The General Partners do not expect any other PIMs still held in the Partnership's portfolio to be repaid during 1998. Two of the properties, Royal Palm Place and Vista Montana, continue to operate under long-term restructure programs. The mediocre operating performances of the two remaining properties, Greentree and La Costa, have not generated sufficient increases in property values to provide an incentive for the owners to pursue either a sale or refinancing of those properties. Both Greentree and La Costa are older properties with physical shortcomings that affect rental income potential and increase the cost of operations. Consequently, neither property generates any participation interest to the Partnership from operating cash flow. The General Partners periodically review the distribution rate to determine whether an adjustment to the distribution rate is necessary based on projected future cash flows. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions of cash available for distribution. To the extent quarterly distributions differ from cash available for distribution, the General Partners may adjust the distribution rate. In the event of a sale or refinancing of the remaining PIMs, the Partnership will distribute the proceeds to investors as a special distribution and adjust the distribution rate as necessary to reflect the anticipated cash inflows from the remaining mortgage investments. For the first five years of the PIMs the borrowers were prohibited from prepaying the insured mortgage loan. For the second five years, the borrower can prepay the insured mortgage by incurring a prepayment penalty. The Partnership has the option to call certain PIMs by accelerating their maturity if the loans are not prepaid by the end of the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Such factors as the condition of the asset, local market conditions, interest rates and available financing will have an impact on this decision. Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by the FNMA, GNMA, FHLMC, HUD and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. FNMA is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represents interest in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government,are backed bythe full faithand creditof the U.S.Government. Operations The following discussion relates to the operation of the Partnership during the years ended December 31, 1997, 1996 and 1995. (Amounts in thousands) 1997 1996 1995 Interest income on PIMs: Base interest $ 3,137 $ 4,644 $ 4,471 Participation interest income 543 114 - Interest income on MBS 2,181 2,315 2,473 Other interest income 218 143 153 Partnership expenses (722) (791) (891) Amortization of prepaid fees and expenses (613) (1,096) (958) Net income $ 4,744 $ 5,329 $ 5,248 Net income decreased in 1997 as compared to 1996 due primarily to a decrease in interest income on PIMs which were somewhat offset by a decrease in amortization expense. Base interest income on PIMs decreased in 1997 as compared to 1996 as a result of a reduction in the invested assets in the Partnership. The reduction in assets was a result of repayments of the Pine Hills PIM in November of 1997 and the Mandalay Apartments PIM in November of 1996. Subsequently, special distributions were made from the Partnership using the payoff proceeds. Interest income on MBS declined approximately $134,000 due to principal collections reducing the outstanding MBS portfolio. Interest income on MBS and base interest income on PIMs will continue to decline as principal collections reduce the outstanding balance of these investments. As the Partnership distributes principal collections on MBS and PIMs through quarterly or special distributions, the invested assets of the Partnership will decline which should result in a continuing decline in interest income. Amortization expense decreased in 1997 as compared to 1996 due to the full amortization of prepaid expenses relating to the Mandalay Apartments PIM in 1996 exceeded the amortization of prepaid expenses relating to the Pine Hills PIM prepayment in 1997. Partnership expenses decreased approximately $69,000 in 1997 versus 1996 mainly as result of lower asset management fees caused by a declining asset base. Net income increased slightly in 1996 as compared to 1995 due primarily to an increase in interest income on PIMs and lower Partnership expenses which were offset by lower interest income on MBS and an increase in amortization expense. Base interest income on PIMs increased in 1996 as compared to 1995 as a result of fully amortizing the remaining unamortized discount on the Mandalay Apartments PIM of approximately $411,000 upon its prepayment in November 1996, net of a decrease in base interest income of approximately $100,000 resulting from the prepayment, a decrease of approximately $83,000 resulting from the modification of the Royal Palm Apartments PIM, and a decrease resulting from the scheduled amortization of the underlying mortgages. In 1995, the Royal Palm Apartments PIM was modified and the interest rate on the FNMA MBS was reduced from 7.75% to 6.25% per annum. The Partnership saw an increase in participation interest income of approximately $114,000 in 1996 versus 1995 due to participation interest income received from the prepayment of the Mandalay Apartments PIM. In the same period interest income on MBS declined approximately $158,000 due to principal collections reducing the outstanding MBS portfolio. Amortization expense increased in 1996 as compared to 1995 due to fully amortizing the remaining prepaid fees and expenses related to the Mandalay Apartments PIM. Partnership expenses decreased approximately $100,000 in 1996 versus 1995 as result of lower asset management fees caused by a declining asset base and decreases of approximately $34,000 in expense reimbursements to affiliates and $27,000 in general and administrative expenses. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Appendix A to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Information as to the directors and executive officers of The Krupp Corporation, which is a General Partner of the Partnership and is a general partner of The Krupp Company Limited Partnership-IV, the other General Partner of the Partnership, is as follows: Position with Name and Age The Krupp Corporation Douglas Krupp (51) Co-Chairman, President and Director George Krupp (53) Co-Chairman, President and Director Robert A. Barrows (40) Vice President and Chief Accounting Officer Douglas Krupp and George Krupp are Co-Founders of The Berkshire Group. Established in 1969 as the Krupp Companies and headquartered in Boston, the Berkshire Group is a privately held real estate-based firm that has expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking and healthcare facility management. The Berkshire Group s interests include ownership of a mortgage company specializing in commercial mortgage financing with a portfolio of approximately $4.5 billion. In addition, The Berkshire Group has a majority ownership interest in Harborside Healthcare (NYSE-HBR), a long-term and subacute care company and a significant ownership interest in Berkshire Realty Company, Inc. (NYSE- BRI), a real estate investment trust specializing in apartment investments. -10- Douglas Krupp is 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. Douglas Krupp is Chairman of The Berkshire Group, Chairman of the Board and a Director of both Berkshire Realty Company, Inc. and Harborside Healthcare. Mr. Krupp also serves as Chairman of the Board and Trustee of both Krupp Government Income Trust and Krupp Government Income Trust II. George Krupp received his undergraduate education from the University of Pennsylvania and Harvard University Extension School and holds a Master s Degree in History from Brown University. Robert A. Barrows is Senior Vice President and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has held several positions within The Berkshire Group since joining the company in 1983 and is currently responsible for accounting, financial reporting, treasury, management information systems and loan closing and servicing for Berkshire Mortgage Finance. 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, 1997 no person owned of record or was known by the General Partners to own beneficially more than 5% of the Partnership's 7,499,999 outstanding Units. The only interests held by management or its affiliates consist of its General Partner and Corporate Limited Partner Interests. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this Item is contained in Note F to the Partnership's financial statements presented in Appendix A to this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Financial Statements - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page F-2 of this report. 2. Financial Statement Schedule - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page F-2 of this report. All other schedules are omitted as they are not applicable, not required or the information is provided in the Financial Statements or the Notes thereto. (b) Exhibits: Number and Description Under Regulation S-K The following reflects all applicable Exhibits required under Item 601 of Regulation S-K: (4) Instruments defining the rights of security holders including indentures: (4.1) Amended Agreement of Limited Partnership dated as of June 27, 1986 [Exhibit A to Prospectus included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 2, 1986 (File No. 33-2520)].* (4.2) Subscription Agreement whereby a subscriber agrees to purchase Units and adopts the provisions of the Amended Agreement of Limited Partnership [Exhibit D to Prospectus included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 2, 1986 (File No. 33- 2520)].* (4.3) Eighth Amendment and Restatement of Certificate of Limited Partnership filed with the Massachusetts Secretary of State on February 6, 1987 [Exhibit 4.3 to Registrant's Report on Form 10-K for the year ended December 31, 1986 (File No. 33-2520)].* (10) Material Contracts: La Costa Apartments (10.1) Prospectus for GNMA Pool No. 168416 (PL). [Exhibit 19.1 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1987 (File No. 33-2520)].* (10.2) Shared Income and Appreciation Agreement, dated March 18, 1987 between International Plaza Associates, Ltd., A Florida limited partnership, and DRG Funding Corporation, a Delaware corporation. [Exhibit 19.2 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1987 (File No. 33-2520)].* (10.3) Multifamily Mortgage, Assignment of Rents and Security Agreement, dated March 18, 1987 between International Plaza Associates, Ltd., a Florida limited partnership, and DRG Funding Corporation, a Delaware corporation. [Exhibit 19.3 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1987 (File No. 33-2520)].* (10.4) Assignment of Mortgage, dated March 18, 1987, between DRG Funding Corporation, a Delaware corporation, (Mortgagee) and Krupp Insured Plus Limited Partnership, a Massachusetts limited partnership, (Assignee). [Exhibit 19.4 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1987 (File No. 33-2520)].* Greentree Apartments (10.5) Prospectus for GNMA Pool No. 238744-(PL). [Exhibit 1 to Registrant's Report on Form 8-K dated December 10, 1987 (File No. 0-15815)].* (10.6) Mortgage Note, dated October 22, 1987, between Greentree Associates, Ltd. and DRG Funding Corporation. [Exhibit 2 to Registrant's Report on Form 8-K dated December 10, 1987 (File No.0-15815)].* (10.7) Mortgage, dated October 22, 1987, between Greentree Associates, Ltd. and DRG Funding Corporation. [Exhibit 3 to Registrant's Report on Form 8-K dated December 10, 1987 (File No. 0-15815)].* (10.8) Shared Income and Appreciation Agreement, dated October 22 1987, between Greentree Associates, Ltd. and DRG Funding Corporation. [Exhibit 4 to Registrant's Report on Form 8-K dated December 10, 1987 (File No. 0-15815)].* (10.9) Assignment of Shared Income and Appreciation Agreement, dated October 22, 1987, between DRG Funding Corporation and Krupp Insured Plus Limited Partnership (as "Assignee"). [Exhibit 5 to Registrant's Report on Form 8-K dated December 10, 1987 (File No. 0-15815)].* (10.10) Multifamily Mortgage, Assignment of Rents and Security Agreement, dated October 22, 1987, between Greentree Associates, Ltd. and DRG Funding Corporation. [Exhibit 6 to Registrant's Report on Form 8-K dated December 10, 1987 (File No. 0-15815)].* (10.11) Assignment of Mortgage (the Multifamily Mortgage, Assignment of Rents and Security Agreement), dated November 23, 1987, between DRG Funding Corporation (as "Mortgagee") and Krupp Insured Plus Limited Partnership (as "Assignee"). [Exhibit 7 to Registrant's Report on Form 8-K dated December 10, 1987 (File No. 0-15815)].* Vista Montana (10.12) Subordinated Promissory Note, dated March 31, 1988, between VM Associates Limited Partnership, an Arizona Limited Partnership and GMAC Mortgage Corporation of PA. [Exhibit 19.7 to Registrant's Report on Form 10-Q for the Quarter Ended March 31, 1988 (File No. 0- 15815)].* (10.13) Subordinated Multi-family Deed of Trust, dated March 31, 1988, between VM Associates Limited Partnership, an Arizona Limited Partnership, and GMAC Mortgage Corporation of PA [Exhibit 19.8 to Registrant's Report on Form 10-Q for the Quarter Ended March 31, 1988 (File No. 0-15815)].* (10.14) Assignment of Subordinated Deed of Trust, dated March 31, 1988, between GMAC Mortgage Corporation of PA, and Krupp Insured Plus-II Limited Partnership, a Massachusetts Limited Partnership. [Exhibit 19.9 to Registrant's Report on Form 10-Q for the Quarter Ended March 31, 1988 (File No. 0-15815)].* (10.15) Assignment of Closing Documents, dated July 12, 1988 by and between Krupp Insured Plus-II Limited Partnership ("KIP-II"), a Massachusetts limited partnership, and Krupp Insured Plus Limited Partnership ("KIP-I"), a Massachusetts limited partnership. [Exhibit 19.10 to Registrant's Report on Form 10-Q for the Quarter Ended June 30, 1988 (File No. 0-15815)].* -14- (10.16) Deed of Trust, dated March 31, 1988 between VM Associates Limited Partnership, an Arizona limited partnership and Transamerica Title Insurance Company, a California corporation. [Exhibit 19.11 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.17) Deed of Trust Note, dated March 31, 1988, between VM Associates Limited Partnership, an Arizona limited partnership and GMAC Mortgage Corporation of PA, a Pennsylvania corporation. [Exhibit 19.12 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.18) Assignment of Mortgage and Collateral Documents, dated March 31, 1988 by and between Krupp Insured Plus-II Limited Partnership, a Massachusetts limited partnership and GMAC Mortgage Corporation of PA, a Pennsylvania corporation. [Exhibit 19.13 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.19) Servicing Agreement, dated March 31, 1988 by and between Krupp Insured Plus-II Limited Partnership, a Massachusetts limited partnership and GMAC Mortgage Corporation of PA, a Pennsylvania corporation. [Exhibit 19.14 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1988 (File No. 0-15815)].* (10.20) Modification to the First mortgage loan and subordinated Promissory Note, dated June 7, 1993, by and between Krupp Insured Plus-II Limited Partnership and V.M. Associates Limited Partnership. [Exhibit 10.28 to Registrant's Report on Form 10-K for the Year Ended December 31, 1994 (File No. 0-15815)].* (10.21) Assignment of interest from Krupp Insured Plus Limited Partnership II to Krupp Insured Plus Limited Partnership, dated February 6, 1995. [Exhibit 10.29 to Registrant's Report on Form 10-K for the Year Ended December 31, 1994 (File No. 0-15815)].* Royal Palm Place (10.22) Supplement to Prospectus for FNMA Pool No. MB-109057. [Exhibit 10.30 to Registrant s Report on Form 10-K for the year ended December 31, 1995(File No. 0-15815)].* (10.23) Subordinated Multifamily Mortgage dated March 20, 1991 between Royal Palm Place, Ltd., a Florida limited partnership (the "Mortgagor") and Krupp Insured Plus- III Limited Partnership (the "Mortgagee"). [Exhibit 19.2 to Registrant's Report on Form 10-Q for the Quarter Ended June 30, 1991 (File No. 0-15815)].* (10.24) Amended and Restated Subordinated Promissory Note dated December 1, 1995 between Royal Palm Place, Ltd., a Florida limited partnership (the "Mortgagor") and Krupp Insured Plus-III Limited Partnership (the "Holder") [Exhibit 10.32 to Registrant s Report on Form 10-K for the year ended December 31, 1995(File No.0-15815)].* (10.25) Modification Agreement dated March 20, 1991 by and between Royal Palm Place, Ltd., a Florida limited partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.4 to Registrant's Report on Form 10-Q for the Quarter Ended June 30, 1991 (File No. 0-15815)].* (10.26) Participation Agreement dated March 20, 1991 between Krupp Insured Plus-III Limited Partnership and Krupp Insured Plus Limited Partnership. [Exhibit 19.1 to Registrant's Report on Form 10-Q for the Quarter Ended September 30, 1991 (File No. 0-15815)].* * Incorporated by reference. (c) Reports on Form 8-K During the last quarter of the year ended December 31, 1997 the Partnership did not file any reports on Form 8-K. -16- 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 2nd day of February, 1997. KRUPP INSURED PLUS LIMITED PARTNERSHIP By: The Krupp Corporation, a General Partner By: /s/ Douglas Krupp Douglas Krupp, Co-Chairman (Principal Executive Officer) and Director of The Krupp Corporation Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 2nd day of February, 1997. Signatures Title(s) /s/ Douglas Krupp Co-Chairman (Principal Executive Officer), Douglas Krupp President and Director of The Krupp Corporation,a General Partner of the Registrant. /s/George Krupp Co-Chairman (Principal Executive Officer) George Krupp and Director of The Krupp Corporation, a General Partner of the Registrant. /s/ Robert A. Barrows Vice President and Chief Accounting Officer Robert A. Barrows of The Krupp Corporation, a General Partner of the Registrant. -17- APPENDIX A KRUPP INSURED PLUS LIMITED PARTNERSHIP FINANCIAL STATEMENTS AND SCHEDULE ITEM 8 of FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 1997 KRUPP INSURED PLUS LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Accountants F-3 Balance Sheets at December 31, 1997 and 1996 F-4 Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 F-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 1997, 1996 and 1995 F-6 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-7 Notes to Financial Statements F-8 - F-15 Schedule IV - Mortgage Loans on Real Estate F-16 - F-17 All other schedules are omitted as they are not applicable or not required, or the information is provided in the financial statements or the notes thereto. F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Insured Plus Limited Partnership: We have audited the financial statements and the financial statement schedule of Krupp Insured Plus Limited Partnership (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 General Partners of the Partnership. 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 these 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. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these financial statements referred to above present fairly, in all material respects, the financial position of Krupp Insured Plus Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 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. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 2, 1998, except as to the information presented in Note I, for which the date is March 16, 1998 KRUPP INSURED PLUS LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 Participating Insured Mortgages ("PIMs") (Notes B, C and H) $37,769,835 $ 42,745,790 Mortgage-Backed Securities and insured mortgage ("MBS") (Notes B, D and H) 25,897,592 27,147,213 Total mortgage investments 63,667,427 69,893,003 Cash and cash equivalents (Notes B and H) 3,100,615 1,757,197 Interest receivable and other assets 534,178 517,476 Prepaid acquisition fees and expenses, net of accumulated amortization of $522,080 and $4,196,787, respectively (Note B) 322,172 832,838 Prepaid participation servicing fees, net of accumulated amortization of $160,008 and $802,641, respectively (Note B) 171,044 273,009 Total assets $ 67,795,436 $ 73,273,523 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 21,117 $ 18,468 Partners' equity (deficit) (Notes A and E): Limited Partners 66,774,981 72,448,679 (7,500,099 Limited Partner interests outstanding) General Partners (224,493) (194,008) Unrealized gain on MBS (Note B) 1,223,831 1,000,384 Total Partners' equity 67,774,319 73,255,055 Total liabilities and Partners' equity $ 67,795,436 $ 73,273,523 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Revenues: Interest income - PIMs Base interest $3,136,659 $4,644,184 $4,470,937 Participation Income 542,650 114,331 - Interest income - MBS 2,181,378 2,315,136 2,472,826 Other interest income 217,976 143,065 153,391 Total revenues 6,078,663 7,216,716 7,097,154 Expenses: Asset management fee to an affiliate (Note F) 502,332 626,375 665,051 Expense reimbursements to affiliates (Note F) 76,727 73,323 107,019 Amortization of prepaid expenses and fees (Note B) 612,631 1,095,679 958,502 General and administrative expenses 143,205 91,991 119,039 Total expenses 1,334,895 1,887,368 1,849,611 Net income (Note G) $4,743,768 $5,329,348 $5,247,543 Allocation of net income (Note E): Limited Partners $4,601,455 $5,169,468 $5,090,117 Average net income per Limited Partner interest $ .61 $ .69 $ .68 (7,500,099 Limited Partner interests outstanding) General Partners $ 142,313 $ 159,880 $ 157,426 F-6 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP Statements of Income For the Years Ended December 31, 1997, 1996 and 1995 Total Limited General Unrealized Partners' Partners Partners Gain Equity Balance at December 31, 1994$ 96,689,550 $ (142,979) $ - $ 96,546,571 Net income 5,090,117 157,426 - 5,247,543 Quarterly distributions (9,000,119) (187,157) - (9,187,276) Unrealized gain on MBS - - 1,162,741 1,162,741 Balance at December 31, 1995 92,779,548 (172,710) 1,162,741 93,769,579 Net income 5,169,468 159,880 - 5,329,348 Quarterly distributions (9,000,119) (181,178) - (9,181,297) Special distributions (16,500,218) - - (16,500,218) Change in Unrealized gain on MBS - - (162,357) (162,357) Balance at December 31, 1996 72,448,679 (194,008) 1,000,384 73,255,055 Net income 4,601,455 142,313 - 4,743,768 Quarterly distributions (Note E) (5,700,093) (172,798) - (5,872,891) Special distributions (Note E) (4,575,060) - - (4,575,060) Change in Unrealized gain on MBS - - 223,447 223,447 Balance at December 31,1997 $ 66,774,981 $ (224,493) $1,223,831 $ 67,774,319 F-8 KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Operating activities: Net income $ 4,743,768 $ 5,329,348 $ 5,247,543 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 612,631 1,095,679 958,502 Prepayment penalty (252,260) - - Changes in assets and liabilities: Decrease (increase) in interest receivable and other assets (16,702) 354,466 111,188 Increase (decrease) in liabilities 2,649 4,014 (280) Net cash provided by operating activities 5,090,086 6,783,507 6,316,953 Investing activities: Principal collections and prepayments on PIMs including prepayment penalty of $252,260 in 1997 5,228,215 16,543,345 548,811 Principal collections on MBS 1,473,068 1,717,268 1,784,581 Net cash provided by investing activities 6,701,283 18,260,613 2,333,392 Financing activities: Quarterly distributions (5,872,891) (9,181,297) (9,187,276) Special distributions (4,575,060) (16,500,218) - Net cash used for financing activities (10,447,951) (25,681,515) (9,187,276) Net increase (decrease) in cash and cash equivalents 1,343,418 (637,395) (536,931) Cash and cash equivalents, beginning of period 1,757,197 2,394,592 2,931,523 Cash and cash equivalents, end of period $ 3,100,615 $ 1,757,197 $ 2,394,592 F-10 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS A. Organization Krupp Insured Plus Limited Partnership (the "Partnership") is a Massachusetts Limited Partnership. The General Partners of the Partnership are The Krupp Corporation and The Krupp Company Limited Partnership-IV and the Corporate Limited Partner is Krupp Depositary Corporation. The Partnership terminates on December 31, 2025, unless terminated earlier upon the occurrence of certain events as set forth in the Partnership Agreement. The Partnership commenced the public offering of Units on July 7, 1986 and completed its public offering having sold 7,499,999 Units for $149,489,830 net of purchase volume discounts of $510,150 as of January 27, 1987. B. Significant Accounting Policies The Partnership uses the following accounting policies for financial reporting purposes which differ in certain respects from those used for federal income tax purposes (Note G): MBS The Partnership in accordance with Financial Accounting Standards Board s Special Report on Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" ( FAS 115 ), classifies its MBS portfolio as available-for-sale. As such the Partnership carries its MBS at fair market value and reflects any unrealized gains (losses) as a separate component of Partners' Equity. The Partnership amortizes purchase premiums or discounts over the life of the underlying mortgages using the effective interest method. PIMs The Partnership accounts for its MBS portion of a PIM in accordance with FAS 115 under the classification of held to maturity. The Partnership carries the Government National Mortgage Association ( GNMA ) or Federal National Mortgage Association ( FNMA ) MBS at amortized cost. The Federal Housing Administration PIM is carried at amortized cost unless the General Partner of the Partnership believes there is an impairment in value, in which case a valuation allowance would be established in accordance with Financial Accounting Standards No. 114, Accounting by Creditors for impairment of a Loan, and Financial Accounting Standard No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Basic interest on PIMs is recognized at the stated rate of the Department of Housing and Urban Development ("HUD") insured mortgage (less the servicer's fee) or the stated coupon rate of the GNMA or FNMA MBS. The Partnership recognizes interest related to the participation features as earned and when it deems these amounts as collectible. Continued F-13 B.Significant Accounting Policies, Continued Cash and Cash Equivalents The Partnership includes all short-term investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. The Partnership invests its cash primarily in commercial paper and money market funds with a commercial bank and has not experienced any loss to date on its invested cash. Prepaid Fees and Expenses Prepaid fees and expenses represent prepaid acquisition fees and expenses and prepaid participation servicing fees paid for the acquisition and servicing of PIMs. The Partnership amortizes the prepaid acquisition fees and expenses using a method that approximates the effective interest method over a period of ten to twelve years, which represents the actual maturity or anticipated repayment of the underlying mortgage. The Partnership repayment the prepaid participation servicing fees using a method that approximates the effective interest method over a ten year period beginning from the acquisition of the GNMA or FNMA MBS or final endorsement of the FHA loan. Income Taxes The Partnership is not liable for federal or state income taxes because Partnership income is allocated to the partners for income tax purposes. If the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and such an examination results in a change in Partnership taxable income, such change will be reported to the partners. Estimates and Assumptions The preparation of financial statements in accordance with 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 period. Actual results could differ from those estimates. C. PIMs At December 31, 1997, the Partnership has investments in four PIMs. The Partnership's PIMs consist of (a) a GNMA or FNMA MBS representing the securitized first mortgage loan on the underlying property or a sole participation interest in a first mortgage loan originated under the FHA lending program on the underlying property (collectively the "insured mortgages"), and (b) participation interests in the revenue stream and appreciation of the underlying property above specified base levels. The borrower conveys these participation features to the Partnership generally through a subordinated promissory note and mortgage (the "Agreement"). The Partnership receives guaranteed monthly payments of principal and interest on the GNMA and FNMA MBS and HUD insures the FHA mortgage loan and the mortgage loan underlying the GNMA MBS. The Partnership may receive interest related to its participation interests in the underlying property, however, these amounts are neither insured nor guaranteed. F-15 KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued C.PIMs, Continued Generally, the participation features consist of the following: (i) "Minimum Additional Interest" which is at the rate of .5% per annum calculated on the unpaid principal balance of the first mortgage on the underlying property, (ii) "Shared Income Interest" which is 25% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent that it exceeds the amount of Minimum Additional Interest earned during such month, (iii) "Shared Appreciation Interest" which is 25% of any increase in the value of the underlying property in excess of a specified base. Payment of participation interest from the operations of the property is limited to 50% of net revenue or surplus cash as defined by FNMA or HUD, respectively. The aggregate amount of Minimum Additional Interest, Shared Income Interest and Shared Appreciation Interest payable by the underlying borrower on the maturity date generally cannot exceed 50% of any increase in value of the property. However, generally any net proceeds from a sale or refinancing of the property will be available to satisfy any accrued but unpaid Shared Income or Minimum Additional Interest. Shared Appreciation Interest is payable when one of the following occurs: (1) the sale of the underlying property to an unrelated third party on a date which is later than five years from the date of the Agreement, (2) the maturity date or accelerated maturity date of the Agreement, or (3) prepayment of amounts due under the Agreement and the insured mortgage. The borrower may prepay the first mortgage loan subject to a 9% prepayment penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty thereafter. Under the Agreement, the Partnership, upon giving twelve months written notice, can accelerate the maturity date of the Agreement to a date not earlier than ten years from the date of the Agreement for (a) the payment of all participation interest due under the Agreement as of the accelerated maturity date, or (b) the payment of all participation interest due under the Agreement plus all amounts due on the first mortgage note on the property. In November of 1997, the borrower of the Pine Hills Apartments PIM prepaid the insured mortgage. The borrower also paid $290,390 and $252,260, representing participation interst income and Shared Appreciation Interest, respectively. The Partnership made a special distribution of $.61 per Unit to investors from the proceeds of the repayment. In November, 1996, the borrower of the Mandalay Apartments PIM completed a refinancing of the property and prepaid the insured mortgage. The borrower also paid $379,000 representing a portion of accumulated participation income. The Partnership made a special distribution of $2.20 per F-16 KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued Unit to investors from the proceeds of the payoff. In November 1996, the Partnership fully amortized the remaining prepaid fees and expenses of the Mandalay Apartments PIM and retired them from the books. At December 31, 1997 and 1996 there were no loans within the Partnership s portfolio that were delinquent as to principal or interest. The Partnership's PIMs consist of the following at December 31, 1997 and 1996: Aggregate Range of Range of Original Number Interest Maturity Investment Basis at Issuer Principal of PIMs Rates Dates(a) December 31, 1997 1996 GNMA $20,146,270 2(d) 7.5%-8% 4/22-12/22 $18,434,869 $23,277,507 (b)(c) FHA 13,814,400 1 7.375% 12/33 13,565,709 13,630,602 (e) FNMA 6,021,258 1 6.50% 4/06 5,769,257 5,837,681 (f) (g) $39,981,928 4 $37,769,835 $42,745,790 (a) The range of maturity dates for PIMs issued by GNMA and FHA represent the stated maturity date of the security or insured mortgage, however, the Partnership anticipates realizing amounts due under these PIMs well before these stated maturity dates. (b) Includes a PIM with a prepayment penalty of 9% in year 6 through 7, 3% in year 8 and 9, with no penalty thereafter. (c) On January 1, 1992, the Partnership entered into an agreement which provided for a reduction in the permanent interest rate on a GNMA PIM having an original face value of $4,900,000, which reduced the interest rate from 8.5% to 7% for a period of four years. The reduction in the permanent interest rate was granted in exchange for a reduction of the Shared Appreciation Interest Base from $5,700,000 to $4,900,000. (d) At December 31, 1996 there were three GNMA PIMs. (e) On November 30, 1993, the Partnership entered into an agreement with the underlying borrower of the FHA PIM for a permanent interest rate reduction from 8.875% per annum to 7.375% per annum, retroactive to January 1, 1992. In exchange for the interest rate reduction, the Partnership received an increase in Shared Appreciation Income from 25% in excess of the base amount of $15,410,000 to 25% of the net sales proceeds over the outstanding indebtedness at the time of sale ($13,565,709 as of December 31, 1997). In the event of a refinancing, Shared Appreciation Income is 25% of the appraised value over the outstanding indebtedness at the time of refinancing. In addition, Shared Income Interest increased from 25% of rental income in excess of the base amount of $175,000 to 25% of all distributable surplus cash. (f) The total PIM on the underlying property is $22,000,000 of which 73% or $15,978,742 is held by Krupp Insured Plus III Limited Partnership. (g) During December 1995, the Partnership agreed to a modification of the Royal Palm PIM. The Partnership received a reissued Federal National Mortgage Association ("FNMA") mortgage-backed security ("MBS") and increased its participation percentage in income and appreciation from 25% to 30%. The Partnership will receive interest only payments on the FNMA MBS at interest rates ranging from 6.25% to 8.775% per annum through maturity. Also, the Partnership has received its pro-rata share of a $90,644 principal payment made in December 1995 and its pro-rata share of a $250,000 principal payment made in January 1997. The Partnership will also receive its pro-rata share of annual principal payments totaling $250,000 due each year in January for the next three years. F-18 KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued C.PIMs, Continued The underlying mortgages of the PIMs are collateralized by multi- family apartment complexes located in three states. The apartment complexes range in size from 336 to 377 units. D. MBS At December 31, 1997, the Partnership s MBS portfolio had an amortized cost of $24,673,761 and gross unrealized gains of $1,223,831. At December 31, 1996, the Partnership's MBS portfolio had an amortized cost of $26,146,829 and gross unrealized gains of $1,000,384. The MBS portfolio has maturities ranging from 2004 to 2033. E. Partners' Equity Profits and losses from Partnership operations and Distributable Cash Flow are allocated 97% to the Unitholders and Corporate Limited Partner (the "Limited Partners") and 3% to the General Partners. Upon the occurrence of a capital transaction, as defined in the Partnership Agreement, net cash proceeds will be distributed first, to the Limited Partners until they have received a return of their total invested capital, second, to the General Partners until they have received a return of their total invested capital, third, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to any deficiency in the10%cumulative return on their invested capital that exists through fiscal years prior to the date of the capital transaction, fourth, to the class of General Partners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and fifth, 96% to the Limited Partners and 4% to the General Partners. Profits arising from a capital transaction will be allocated in the same manner as related cash distributions. Losses from a capital transaction will be allocated 97% to the Limited Partners and 3% to the General Partners. During 1997, 1996 and 1995, the Partnership made quarterly distributions totaling $.76, $1.20 and $1.28 per Unit, respectively. The Partnership made special distributions of $.61 and $2.20 per Unit in 1997 and 1996, respectively. As of December 31, 1997, the following cumulative partner contributions and allocations have been made since inception of the Partnership: F-19 KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued Continued E. Partners' Equity, Continued Corporate Limited General Unrealized Unitholders Partner Partners gain on MBS Total Capital $149,489,830 $ 2,000 $ 3,000 $ _ $149,494,830 contributions Syndication (7,906,604) - - - (7,906,604) Costs Quarterly distributions (106,136,047) (1,459) (2,502,323) - (108,639,829) Special distributions (42,224,975) (563) - - (42,225,538) Net income 73,551,809 990 2,274,830 - 75,827,629 Unrealized gains on MBS - - - 1,223,831 1,223,831 Balance at December 31, 1997 $66,774,013 $ 968 $ (224,493) $1,223,831 $ 67,774,319 F. Related Party Transactions Under the terms of the Partnership Agreement, the General Partners receive an Asset Management Fee equal to .75% per annum of the value of the Partnership's total invested assets payable quarterly. The General Partners may also receive an incentive management fee in an amount equal to .3% per annum on the Partnership's Total Invested Assets providing the Unitholders receive a specified non-cumulative annual return on their Invested Capital. Total fees payable to the General Partners for asset management and incentive management fees shall not exceed 10% of distributable cash flow over the life of the Partnership. Additionally, the Partnership reimburses affiliates of the General Partners for certain expenses incurred in connection with maintaining the books and records of the Partnership and the preparation and mailing of financial reports, tax information and other communications to investors. G. Federal Income Taxes The reconciliation of the net income reported in the accompanying statement of income with the net income reported in the Partnership's 1997 federal income tax return is as follows: Net income from statement of operations $ 4,743,768 Less: Book to tax difference for amortization of prepaid expenses and fees 227,087 Net income for federal income tax purposes $ 4,970,855 Continued G. Federal Income Taxes, Continued The allocation of the 1997 net income for federal income tax purposes is as follows: Portfolio Income Unitholders $4,829,233 Corporate Limited Partner 64 General Partners 141,558 $4,970,855 For the years Ended December 31, 1997, 1996 and 1995 the average per unit net income to the Unitholders for federal income tax purposes was $.64, $.71 and $.79, respectively. The basis of the Partnership s assets for financial reporting purposes is less than its tax basis by approximately $442,000 and $438,000 at December 31, 1997 and 1996, respectively. The basis of the Partnership s liabilities for financial reporting purposes are the same for its tax basis at December 31, 1997 and 1996, respectively. H. Fair Value Disclosures of Financial Instruments The Partnership used the following methods and assumptions to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of those instruments. MBS The Partnership estimated the fair value of MBS based on quoted market prices. PIMs There is no active trading market for these investments. Management estimates the fair value of the PIMs using quoted market prices of MBS having the same stated coupon rate. Management does not include any participation income in the Partnership s estimated fair value arising from the properties, because Management does not believe it can predict the time of realization of the feature with any certainty. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in PIMs had gross unrealized gains and losses of approximately $133,000 and $22,000 at December 31, 1997, respectively, and unrealized gains and losses of approximately $474,000 and $652,000 at December 31, 1996. H. Fair Value Disclosures of Financial Instruments At December 31, 1997 and 1996, the Partnership estimates fair value of its financial instruments as follows: (Rounded to $1,000) 1997 1996 Cash and cash equivalents $ 3,101 $ 1,757 MBS 25,898 27,147 PIMs 37,881 42,568 $66,880 $71,472 I. Subsequent Event On March 16, 1998, the Partnership received proceeds from the prepayment of the Greentree Apartments PIM. The Partnership received the outstanding principal balance of $8,382,336. The Partnership plans on distributing $1.12 per Limited Partner Interest during April 1998 from these principal proceeds of this loan. F-23 KRUPP INSURED PLUS LIMITED PARTNERSHIP SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE Normal Carrying Interest Monthly Amount at Rate Maturity Payment Original Current 12/31/97 PIMs (a)(b) (c) Date (d) (e)(f) Face Amount Face Amount (j) GNMA La Costa Apts.7.5% 4/15/22 $ 74,500 $11,050,000 $10,035,381 $10,035,381 Greentree Apts.8% 11/15/22 64,600 9,096,270 8,399,488 8,399,488 Hoover, AL 20,146,270 18,434,869 18,434,869 FHA Vista Montana Apts. 7.375% 12/1/33 86,000 13,814,400 13,565,709 13,565,709 Val Vista Lakes Az(h) FNMA Royal Palm Place (g) 6.5% 4/1/06 (i) 6,021,258 5,769,257 5,769,257 Kendall, FL (i) $39,981,928 $37,769,835 $37,769,835 (a) The Participating Insured Mortgages ("PIMs") consist of either a mortgage- backed security ("MBS") issued and guaranteed by the Federal National Mortgage Association ("FNMA"), a securitized mortgage loan insured by the Department of Housing and Urban Development ("HUD") and issued and guaranteed as to the timely payment of principal and interest by the Government National Mortgage Association ("GNMA") or a first mortgage issued by the Federal Housing Authority ("FHA") and insured by HUD, and a subordinated promissory note and mortgage or shared income and appreciation agreement with the underlying borrower that conveys participation interests in the revenue stream and appreciation of the underlying property above certain base levels. (b) The GNMA MBS, FNMA MBS and FHA mortgage loans may generally be prepaid subject to a 9% prepayment penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty after year ten. (c) Represents only the stated interest rate of the GNMA or FNMA MBS or the stated interest rate of the FHA mortgage loan less the servicing fee. In addition, the Partnership may receive participation interest, consisting of (i) Minimum Additional Interest based on a percentage of the unpaid principal balance of the first mortgage on the property, (ii) Shared Income Interest based on a percentage of monthly gross income generated by the underlying property in excess of a specified base amount (but only to the extent it exceeds the amount of Minimum Additional Interest received during such month) and (iii) Shared Appreciation Interest based on a percentage of any increase in the value of the underlying property in excess of a specified base value. Minimum Additional Interest is at a rate of .5% per annum calculated on the unpaid principal balance of the first mortgage note. Shared Income Interest is generally based on 25% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent it exceeds the amount of Minimum Additional Interest earned during the month. Shared Appreciation Interest is generally based on 25% of any increase in the value of the project over the base value. F-25 KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE, Continued __________ (d) The Partnership's GNMA MBS and FHA mortgage loan have call provisions, which allow the Partnership to accelerate their respective maturity dates to as early as ten years from the date of the loan closing. (e) The normal monthly payment consisting of principal and interest is payable monthly at level amounts over the term of the GNMA MBS and the FHA direct mortgages. (f)The normal monthly payment consisting of principal and interest for FNMA MBS is payable at level amounts based on a 35-year amortization. All unpaid principal and accrued interest is due at maturity. (g)The total PIM on the underlying property is $22,000,000 of which 72.63% or $15,978,742 is held by Krupp Insured Plus-III Limited Partnership. The Partnership's share of the principal balance due at maturity for the Royal Palm PIM is approximately $5,564,000. (h) On November 30, 1993, the Partnership entered into an agreement with the underlying borrower for a permanent interest rate reduction from 8.75% per annum to 7.375% per annum retroactive to January 1, 1992. In exchange for the interest rate reduction, the Partnership received an increase in Shared Appreciation Income from 25% in excess of the base amount of $15,410,000 to 25% of the net sales proceeds over the outstanding indebtedness at sale ($13,565,709 at December 31, 1997). In the event of a refinancing, Shared Appreciation Income is 25% of the appraised value over the outstanding indebtedness at refinance. In addition, Shared Income Interest increased from 25% of rental income in excess of the base amount of $175,000 to 25% of all distributable surplus cash. (i)During December 1995, the Partnership agreed to a modification of the Royal Palm PIM. The Partnership received a reissued Federal National Mortgage Association ("FNMA") mortgage-backed security ("MBS") and increased its participation percentage in income and appreciation from 25% to 30%. The Partnership will receive interest only payments on the FNMA MBS at interest rates ranging from 6.25% to 8.775% per annum through maturity. Also, the Partnership has received its pro-rata share of a $90,644 principal payment made in December 1995 and its pro-rata share of a $250,000 principal payment made in January 1997. The Partnership will also receive its pro- rata share of annual principal payments totaling $250,000 due each year in January for the next three years. (j)The aggregate cost of PIMs for federal income tax purposes is $37,769,835. A reconciliation of the carrying value of Mortgages for each of the three years in the period ended December 31, 1997 is as follows: 1997 1996 1995 Balance at beginning of period $42,745,790 $ 59,289,135 $ 59,837,946 Deductions during period: Prepayment and principal collections (4,975,955) (16,543,345) (548,811) Balance at end of period $37,769,835 $ 42,745,790 $ 59,289,135 F-26 F-28