**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)** |                                                                                                                                                                                                                                                                                                           |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                           |   |
| **ý**     | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                      |   |
|           |                                                                                                                                                                                                                                                                                                           |   |
|           | **For  the fiscal year ended   December 31, 2002**                                                                                                                                                                                                                                                   |   |
|                |                                                                                                                                                                                                                                                                                                           |   |
| **OR**         |                                                                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                           |
| o              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                  |   |
|           |                                                                                                                                                                                                                                                                                                           |   |
|           | **For the transition period from                        to                      ** |   |
|           |                                                                                                                                                                                                                                                                                                           |   |
|           | **Commission file number    0-16817**                                                                                                                                                                                                                                                                |   |

 
| **Krupp  Insured Plus-II Limited Partnership**         |
|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |

 

| **Massachusetts**                                                                                                                                                |   | **04-2955007**                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                                                                                                  |   | (IRS Employer  Identification No.) |
|                                                                                                                                                             |   |                               |
| **One Beacon Street, Boston, Massachusetts**                                                                                                                     |   | **02108**                          |
| (Address of principal  executive offices)                                                                                                                        |   | (Zip Code)                         |
|                                                                                                                                                             |   |                               |
| (Registrant’s telephone number, including area  code)   **(617) 523-0066**                                                                   |
|                                                                                                                                                             |
| 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   ý    No   o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. o.

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).

 

Yes o     Noý

 

Aggregate market value of voting securities held bynon-affiliates:  Not applicable, assecurities are non-voting.

 

Documents incorporated by reference: See Item 15

 

The exhibit index is located on pages 9-10.

 

 

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PART I

 

This form 10-K contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21e of the SecuritiesExchange Act of 1934.  Actual resultscould differ materially from those projected in the forward-looking statementsas a result of a number of factors, including those identified herein.

 

ITEM 1.                                                     BUSINESS

 

Krupp Insured Plus-II Limited Partnership (the “Partnership”) is aMassachusetts limited partnership which was formed on October 29, 1986.  The Partnership raised approximately $292million through a public offering of Limited Partner interests evidenced byunits of depositary receipts (“Units”) and used the investable proceedsprimarily to acquire participating insured mortgages (“PIMs”) andmortgage-backed securities and insured mortgages (“MBS”).  The Partnership considers itself to beengaged only in the industry segment of investment in mortgages.

 

The Partnership has investments in MBS collateralized by single-familyor multi-family mortgage loans issued or originated by Fannie Mae, theDepartment of Housing and Urban Development (“HUD”) or the Federal Home LoanMortgage Corporation (“FHLMC”).  FannieMae and FHLMC guarantee the principal and basic interest of the Fannie Mae andFHLMC MBS, respectively and HUD insures its own direct mortgage loans.  The Partnership’s investments are notexpected to be subject to seasonal fluctuations.

 

As a result of the payoff of the Denrich Apartments PIM, thePartnership is in the process of winding up its business, which it expects tocomplete in the first half of 2003. The Partnership will sell its remaining MBSand then make a Terminating Capital Transaction distribution to the partners.In connection therewith, the Partnership has changed its basis of accounting asof December 31, 2002 from the going-concern basis to the liquidation basis ofaccounting.

 

The Partnership will not underwrite securities of other issuers, offersecurities in exchange for property, invest in securities of other issuers forthe purpose of exercising control or issue senior securities and has notengaged in any of these activities during the past.  The Partnership has not repurchased or reacquired any of theLimited Partner interests from the Limited Partners or Units from Unitholdersin the past and does not intend to do so in the future.  The Partnership may not make loans to any GeneralPartner or any affiliate of any General Partner and will not make loans to anyother entity other than mortgage investments of the type described above.

 

The requirements for compliance with federal, state and localregulations to date have not had a material adverse effect on the Partnership’soperations, and no material adverse effect is anticipated in the future.

 

As of December 31, 2002, no personnel were directly employed by thePartnership.

 

ITEM 2.                                                     PROPERTIES

 

None

 

ITEM 3.                                                     LEGALPROCEEDINGS

 

There are no material pending legal proceedings to which thePartnership is a party or to which any of its investments is the subject.

 

ITEM 4.                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

PART II

 

ITEM 5.                                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

There currently is no established trading market for the Units.

 

The number of investors holding Units as of December 31, 2002 wasapproximately 12,300.  One of theobjectives of the Partnership is to provide quarterly distributions of cashflow generated by its investments in mortgages. The Partnership anticipatesthat future operations will continue to generate cash available for quarterlydistributions until the Partnership is liquidated.

 

2

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On August 28, 2002, the Partnership paid a special distribution of $.97per Limited Partner interest from the Richmond Park Apartments MBS principalproceeds received during June 2002 in the amount of $14,073,943.

 

On June 19, 2002, the Partnership paid a special distribution of $.22per Limited Partner interest from the Denrich Apartments PIM principal proceedsreceived during May 2002 in the amount of $3,084,121.

 

On July 18, 2001, the Partnership paid a special distribution of $.31per Limited Partner interest from the Orchard Landing MBS principal proceedsreceived during May 2001 in the amount of $4,440,315.

 

The Partnership will make a final special distribution in the firsthalf of 2003 when it liquidates its remaining assets.

 

The Partnership made the following distributions to its Partners duringthe two years ended December 31, 2002 and 2001:

 
|                      |   | **2002**   |       | **2001**     |       |
|---------------------------|--------|------------|------------|--------------|------------|
|                      |   | **Amount** |       | **Per Unit** | ** ** | **Amount** | ** ** | **Per Unit** | ** ** |
|                      |   |       |       |         |       |   |   |   |   |
| Quarterly  Distributions: |   |       |       |         |       |   |   |   |   |
| Limited Partners          |   | $          | 2,931,103  |         | $          | .20 |   | $ | 5,862,204 |   | $ | .40 |   |
| General Partners          |   | 51,621     |       | —       |       | 69,366 |   | — |   |
|                      |   |       |       |         |       |   |   |   |   |
|                      |   | 2,982,724  |       |         |       | 5,931,570 |   |   |   |
|                      |   |       |       |         |       |   |   |   |   |
| Special  Distributions:   |   |       |       |         |       |   |   |   |   |
| Limited Partners          |   | 17,440,059 |       | $            | 1.19       |   | 4,543,209 |   | $ | .31 |   |
|                      |   |       |       |         |       |   |   |   |   |
| Total  Distributions      |   | $          | 20,422,783 |         |       |   | $ | 10,474,779 |   |   |   |

 

ITEM 6.                                                     SELECTEDFINANCIAL DATA

 

The following table sets forth selected financial information regardingthe Partnership’s financial position and operating results.  This information should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand 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.

 
|                               |   | **2002**   |      | **2001**   |   | **2000**   |   | **1999**   |      | **1998**    |   |
|------------------------------------|--------|------------|-----------|------------|--------|------------|--------|------------|-----------|-------------|--------|
|                               |   |       |      |       |   |       |   |       |      |        |   |
| Total revenues                     |   | $          | 2,061,435 |       | $      | 2,790,634  |   | $          | 3,520,446 |        | $      | 7,822,665 |   | $ | 15,335,618 |   |
|                               |   |       |      |       |   |       |   |       |      |        |   |
| Net income                         |   | 1,570,499  |      | 2,171,571  |   | 2,770,378  |   | 6,146,718  |      | 12,017,670  |   |
| Net income  allocated to:          |   |       |      |       |   |       |   |       |      |        |   |
| Limited Partners  (“LP”) |   | 1,523,384  |      | 2,106,424  |   | 2,687,267  |   | 5,962,316  |      | 11,657,140  |   |
| Average per LP  interest           |   | .10        |      | .14        |   | .18        |   | .41        |      | .80         |   |
|                               |   |       |      |       |   |       |   |       |      |        |   |
| General Partners                   |   | 47,115     |      | 65,147     |   | 83,111     |   | 184,402    |      | 360,530     |   |
| Total assets at:                   |   |       |      |       |   |       |   |       |      |        |   |
| December 31                        |   | 15,117,310 |      | 34,466,969 |   | 42,256,448 |   | 60,161,993 |      | 117,626,762 |   |
|                               |   |       |      |       |   |       |   |       |      |        |   |
| Distributions  to:                 |   |       |      |       |   |       |   |       |      |        |   |
| Quarterly to LPs                   |   | 2,931,103  |      | 5,862,204  |   | 5,862,204  |   | 11,138,189 |      | 16,414,173  |   |
| Average per LP  interest           |   | .20        |      | .40        |   | .40        |   | .76        |      | 1.12        |   |
|                               |   |       |      |       |   |       |   |       |      |        |   |
| Specials to LPs                    |   | 17,440,059 |      | 4,543,209  |   | 14,802,066 |   | 51,587,401 |      | 56,716,830  |   |
| Average per LP  interest           |   | 1.19       |      | .31        |   | 1.01       |   | 3.52       |      | 3.87        |   |
|                               |   |       |      |       |   |       |   |       |      |        |   |
| General Partners                   |   | 51,621     |      | 69,366     |   | 97,176     |   | 217,645    |      | 385,355     |   |
|                                    |        |            |           |            |        |            |        |            |           |             |        |  |  |  |  |  |

 

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ITEM 7.                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and elsewhere in this Form 10-Kconstitute “forward-looking statements” within the meaning of the FederalPrivate Securities Litigation Reform Act of 1995.  These forward-looking statements involve known and unknown risks,uncertainties and other factors which may cause the Partnership’s actualresults, performance or achievements to be materially different from any futureresults, performance or achievements expressed or implied by theseforward-looking statements.  Thesefactors include, among other things, federal, state or local regulations;adverse changes in general economic or local conditions; prepayments ofmortgages; uninsured losses and potential conflicts of interest between thePartnership and its affiliates, including the General Partners.

 

Liquidity and Capital Resources

 

At December 31, 2002, the Partnership had liquidity consisting of cashand cash equivalents of approximately $1.3 million as well as the cash flowprovided by its investments in MBS and interest earned on the Partnership’scash and cash equivalents.  ThePartnership anticipates that these sources will be adequate to provide thePartnership with sufficient liquidity to meet its obligations during itsliquidation.

 

As a result of the payoff of the Denrich Apartments PIM, the Partnershipis in the process of winding up its business, which it expects to complete inthe first half of 2003. The Partnership will sell its remaining MBS and thenmake a Terminating Capital Transaction distribution to the partners. Inconnection therewith, the Partnership has changed its basis of accounting as ofDecember 31, 2002 from the going-concern basis to the liquidation basis ofaccounting.

 

The Partnership received a payoff of the Hampton Place insured mortgageon March 5, 2003 for $11,363,788.  ThePartnership also received a prepayment premium of $113,638 from thispayoff.  The Partnership anticipatespayment of a special distribution of $.79 per Limited Partner interest from theproceeds received to be paid in the first half of 2003.

 

The Partnership received a payoff of the Richmond Park Apartments MBSon June 17, 2002 for $14,073,943.  OnAugust 28, 2002, the Partnership paid a special distribution of $.97 perLimited Partner interest from the principal proceeds received.

 

On May 15, 2002, the Partnership received $3,084,121 representing theprincipal proceeds on the first mortgage loan from the Denrich ApartmentsPIM.  In addition, the Partnershipreceived $100,625 from an affiliate of the Partnership to compensate thePartnership for its inability to collect the unpaid interest that resulted fromthe interest rate reduction agreement entered into in June 1995.  On June 19, 2002, the Partnership paid aspecial distribution of $.22 per Limited Partner interest from the principalproceeds received.

 

During May 2001, the Partnership received a payoff of the OrchardLanding MBS in the amount of $4,440,315. On July 18, 2001 the Partnership paid a special distribution of $.31 perLimited Partner interest from the principal proceeds received.

 

Also during May 2001, the Partnership received $30,769 from theborrowers of the Richmond Park PIM as a settlement to release the loan’sparticipation features.  The propertywas not generating sufficient cash flow to pay any participation from propertyoperations nor did it have sufficient appreciation in value to meet thethreshold to pay any participation based on value if the property was sold orrefinanced.  Considering the property’sphysical condition, there was little likelihood that its status wouldimprove.  Rental rate increase andoccupancy levels had been difficult to achieve.  Consequently, all of the cash flow generated by the property wentback into operations.  While the borrowerhad assured the Partnership that the insured first mortgage debt was serviced,no major capital improvements were undertaken to enhance the property’s leasingefforts.  Furthermore, routinemaintenance and repairs were beginning to be prioritized according to need andavailable cash.  The condition of theproperty and its inability to generate sufficient cash flow seriously impairedthe ability of the borrower to either sell the property or refinance it withouttaking a loss.  The borrower’s businessplan was to make a significant investment in the property to correct deferredmaintenance and functional obsolescence and to market it for leasing in orderto reposition the property for a successful sale or refinance.  The borrowers were unwilling to make thesignificant investments necessary while the property was encumbered with thePIM’s participation features.  As aresult, the borrowers requested a release of the participation features whilekeeping the insured first mortgage in place until the property turned around.  The General Partners agreed to this requestin return for the settlement because there was no expectation that thePartnership would be entitled to any participation proceeds based on theproperty’s physical condition.  Uponthis settlement, the insured first mortgage loan on Richmond Park wasreclassified from a PIM to a MBS as the only remaining portion of theinvestment was a GNMA MBS.  ThePartnership also reclassified this investment as available-for-sale concurrentwith the release of the participation feature. The Partnership continued to receive the scheduled principal andinterest payments on the first mortgage until it was paid in full.

 

4

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On March 30, 2000, the Partnership paid a special distribution of $.58per Limited Partner interest from the prepayment proceeds received duringFebruary 2000 on the Greenhouse Apartments PIM in the amount of$8,428,984.  The underlying property wasforeclosed on by the first mortgage lender in January 1999.  The Partnership continued to receive itsfull principal and basic interest payments due on the PIM while the underlyingmortgage was in default because those payments were guaranteed by GNMA. ThePartnership did not receive any participation interest from this transaction.

 

On January 11, 2000, the Partnership paid a special distribution of$.43 per Limited Partner interest from the Saratoga Apartments PIM prepaymentproceeds received in December 1999 in the amount of $6,204,960. The underlyingproperty value had not increased sufficiently to meet the criteria for the Partnershipto earn any participation interest.

 

Critical Accounting Policy

 

The Partnership’s critical accounting policy relates to thePartnership’s estimates included in its liquidation basis accountingstatements.  The Partnership’s policy isas follows:

 

The Partnership is in the process of winding up its business, which itexpects to complete in the first half of 2003. After the sale of thePartnership’s MBS, the Partnership will make a Terminating Capital Transactiondistribution to the partners. In connection therewith, the Partnership haschanged its basis of accounting as of December 31, 2002 from the going-concernbasis to the liquidation basis of accounting. The liquidation basis ofaccounting requires that assets and liabilities be stated at their estimatednet realizable value and that estimated costs of liquidating the Partnership beprovided to the extent that they are reasonably determinable. The Partnershipestimates that the costs to liquidate will be approximately $2,500, whichprimarily relates to final tax preparation work including the issuance of finalK-1 statements to the partners.

 

ITEM 7A.                                           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Assessment of Credit Risk

 

The Partnership’s investments in MBS are guaranteed and/or insured byFannie Mae, FHLMC or HUD and therefore the certainty of their cash flows andthe risk of material loss of the amounts invested depends on thecreditworthiness of these entities.

 

Fannie Mae is a federally chartered private corporation that guaranteesobligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligationsoriginated under its programs.  Theseobligations are not guaranteed by the U.S. Government or the Federal Home LoanBank Board.  However, Fannie Mae andFHLMC are two of the largest corporations in the United States with significantexperience in mortgage securitizations. In addition, their MBS instruments carry the highest credit rating givento financial instruments.  Obligationsinsured by HUD, an agency of the U.S. Government, are backed by the full faithand credit of the U.S. Government.

 

At December 31, 2002 the Partnership included in cash and cashequivalents approximately $998,000 of commercial paper, which is issued byentities with a credit rating equal to one of the top two rating categories ofa nationally recognized statistical rating organization.

 

Interest Rate Risk

 

The Partnership’s primary market risk exposure is to interest raterisk, which can be defined as the exposure of the Partnership’s net income,comprehensive income or financial condition to adverse movements in interestrates.  At December 31, 2002, thePartnership’s MBS comprised the majority of the Partnership’s assets.  Decreases in interest rates may acceleratethe prepayment of the Partnership’s investments.  Increases in interest rates may decrease the proceeds from a saleof the MBS.

 

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The table below provides information about the Partnership’s financial instrumentsthat are sensitive to changes in interest rates.  For mortgage investments, the table presents principal cash flowsand related weighted average interest rates (“WAIR”) by expected maturitydates.  The expected maturity date is2003 due to the plan of liquidation.

 
|                        |   | **Expected  maturity dates ($ in thousands)** |   |
|-----------------------------|--------|-----------------------------------------------|--------|
|                        |   | **2003**                                      |   | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **Thereafter** | ** ** | **Total  Face  Value** | ** ** | **Fair  Value(1)** | ** ** |
|                        |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-sensitive  assets: |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                        |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MBS                         |   | $                                             | 13,548 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 13,548 |   | $ | 13,682 |   |
| WAIR                        |   | 7.56                                          | %      |   |   |   |   |   |   |   |   |   |   | 7.56 | % |   |   |
|                             |        |                                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)     The methodology used by the Partnership toestimate the fair value of financial instruments is described in Note H to thePartnership’s financial statements presented in Appendix A to this report.

 

Also included in the Partnership’s assets are cash and cashequivalents.  Due to the short termmaturity of these investments, generally less than three months, thePartnership is not exposed to significant interest rate risk on theseinvestments.

 

Results of Operations

 

The following discussion relates to the operation of the Partnershipduring the years ended December 31, 2002, 2001 and 2000.

 
|                                       |   | **(Amounts  in thousands)** |   |
|--------------------------------------------|--------|-----------------------------|--------|
|                                       |   | **2002**                    |   | **2001** | ** ** | **2000** | ** ** |
|                                       |   |                        |   |   |   |   |   |
| Interest income  on PIMs:                  |   |                        |   |   |   |   |   |
| Basic interest                             |   | $                           | 183    |   | $ | 613 |   | $ | 1,360 |   |
| Participation  interest                    |   | —                      |   | 31 |   | — |   |
| Interest income  on MBS                    |   | 1,569                       |   | 2,022 |   | 1,685 |   |
| Other interest  income                     |   | 309                         |   | 125 |   | 475 |   |
| Partnership  expenses                      |   | (491                        | )      | (553 | ) | (628 | ) |
| Amortization of  prepaid fees and expenses |   | —                      |   | (66 | ) | (122 | ) |
|                                       |   |                        |   |   |   |   |   |
| Net Income                                 |   | $                           | 1,570  |   | $ | 2,172 |   | $ | 2,770 |   |

 

Net income decreased in 2002 as compared to 2001 primarily due to lowerbasic interest on PIMs and lower MBS interest income.  This decrease was partially offset by an increase in otherinterest income and decreases in asset management fees.  The reduction in basic interest on PIMs isprimarily due to the reclassification of the Richmond Park PIM to a MBS in May2001.  In 2001, the Partnership receiveda payment from the borrower of the Richmond Park PIM as a settlement to releasethe loan’s participation feature.  ThePartnership continued to receive the scheduled payments on the insured firstmortgage and the classification of interest income was changed from PIMinterest income to MBS interest income. Basic interest on PIMs also decreased due to the payoff of the DenrichApartments PIM in May 2002.  MBSinterest decreased due to the payoff of the Richmond Park Apartments MBS inJune 2002 and the payoff of the Orchard Landing MBS in May 2001.  MBS interest income also decreased due toon-going single-family MBS principal collections.  Other interest income increased due to the receipt of interestincome earned on the float from the Partnership’s distribution account.  Asset management fees decreased due to thedecrease in the Partnership’s investments as a result of principal collectionsand payoffs.

 

Net income decreased during 2001 as compared to 2000 primarily due tolower basic interest on PIMs and other interest income. This decrease waspartially offset by an increase in interest income on MBS.  The reduction in basic interest on PIMs isprimarily due to the reclassification of the Richmond Park PIM to an MBS in May2001.  Interest income on MBS increaseddue to the reclassification, but was partially offset by the payoff of theOrchard Landing MBS in May 2001.  Otherinterest income decreased due to significantly lower average interest ratesearned on cash balances available for short-term investing in 2001 versus 2000.

 

ITEM 8.                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

See Appendix A to this report.

 

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ITEM 9.                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

PART III

 

ITEM 10.                                               DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The Partnership has no directors or executive officers.  Information as to the directors andexecutive officers of Krupp Plus Corporation which is a General Partner of the Partnershipand is the general partner of Mortgage Services Partners Limited Partnership,which is the other General Partner of the Partnership, is as follows:

 

 
| **Name and Age**      |   | **Position  with  Krupp Plus Corporation**       |
|-----------------------|--------|--------------------------------------------------|
|                  |   |                                             |
| Douglas Krupp (56)    |   | President, Co-Chairman of the Board and Director |
| George Krupp (58)     |   | Co-Chairman of the Board and Director            |
| Peter F. Donovan (49) |   | Senior Vice President                            |
| Ronald Halpern (61)   |   | Senior Vice President                            |
| Alan Reese (49)       |   | Vice President and Treasurer                     |
| Carol J.C. Mills (53) |   | Vice President                                   |

 

Douglas Krupp co-founded and serves as Co-Chairman and Chief ExecutiveOfficer of The Berkshire Group, an integrated real estate financial servicesfirm engaged in real estate acquisitions, property management, investmentsponsorship, venture capital investing, mortgage banking and financialmanagement, and ownership of two operating companies through private equityinvestments.  Mr. Krupp has held theposition of Co-Chairman since The Berkshire Group was established as The KruppCompanies in 1969 and he has served as the Chief Executive Officer since 1992.He is a graduate of Bryant College where he also received an honorary Doctor ofScience in Business Administration in 1989.

 

George Krupp is the Co-Founder and Co-Chairman of The Berkshire Group,an integrated real estate financial services firm engaged in real estateacquisitions, property management, investment sponsorship, venture capitalinvesting, mortgage banking and financial management, and ownership of twooperating companies through private equity investments. Mr. Krupp has held theposition of Co-Chairman since The Berkshire Group was established as The KruppCompanies in 1969.  Mr. Krupp attendedthe University of Pennsylvania and Harvard University and holds a Master’sDegree in History from Brown University. Douglas and George Krupp are brothers.

 

Peter F. Donovan is Chief Executive Officer of Berkshire MortgageFinance which position he has held since January 1998.  In this capacity, he oversees the strategicgrowth plans of this mortgage banking firm. Berkshire Mortgage Finance is the 12th largest commercial mortgageservicer in the United States with a servicing and asset management portfolioof  $16.4 billion. Previously he servedas President of Berkshire Mortgage Finance from January 1993 to January 1998and in that capacity he directed the production, underwriting, servicing andasset management activities of the firm. Prior to that, he was Senior Vice President of Berkshire Mortgage Financeand was responsible for all participating mortgage originations.  Before joining the firm in 1984, he wasSecond Vice President, Real Estate Finance for Continental Illinois NationalBank & Trust, where he managed a $300 million construction loan portfolioof commercial properties. Mr. Donovan received a B.A. from Trinity College andan M.B.A. degree from Northwestern University. Mr. Donovan is currently a member of the Advisory Council for FannieMae.

 

Ronald Halpern is President and COO of Berkshire Mortgage Finance.  He has served in these positions sinceJanuary 1998 and in this capacity, he is responsible for the overall operationsof the Company.  Prior to January 1998,he was Executive Vice President, managing the underwriting, closing, portfoliomanagement and servicing departments for Berkshire Mortgage Finance. Beforejoining the firm in 1987, he held senior management positions with theDepartment of Housing and Urban Development in Washington D.C. and several HUDregional offices.  Mr. Halpern has over30 years of experience in real estate finance which includes his experience asprior Chairman of the Mortgage Bankers Association Multifamily HousingCommittee. He holds a B.A. degree from the University of the City of New Yorkand J.D. degree from Brooklyn Law School.

 

Alan Reese is the Executive Vice President, Corporate Operations andChief Financial Officer of Berkshire Mortgage Finance.  Mr. Reese joined Berkshire Mortgage Financein February of 2003 and is currently responsible for the accounting, financialplanning and reporting, treasury, information technology, mortgage trading deskand loan servicing functions.  Prior tojoining Berkshire Mortgage Finance, Mr. Reese was the Chief Financial Officerof Visible Markets, Inc. from 2000 to 2001 and was engaged in business as a consultantfrom 2001-January, 2003.  Prior toVisible Markets, Inc., he was the Senior Vice President and Chief FinancialOfficer of Mortgage Lenders Network USA, Inc. from 1998-2000.  Mr. Reese held several positions with

 

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BankBoston Corporation from 1990 to 1998 and most recently held theposition of Director of Operations, National Consumer Lending from1996-1998.  In addition, Mr. Reese wasemployed with Coopers & Lybrand from 1976 to 1990, and was a partner from1987-1990.  Mr. Reese presently serveson the Board of Trustees for Berklee College of Music.  He received a B.B.A. degree from theUniversity of Wisconsin – Eau Claire and is a Certified Public Accountant.

 

Carol J.C. Mills is Senior Vice President for Loan Management ofBerkshire Mortgage Finance and in this capacity, she is responsible for theAsset Management functions of Berkshire Mortgage Finance. She manages theestimated $16.4 billion portfolio of loans. Ms. Mills joined Berkshire in December 1997 as Vice President and waspromoted to Senior Vice President in January 1999.  From January 1989 through November 1997, Ms. Mills was VicePresident of First Winthrop Corporation and Winthrop Financial Associates, inCambridge, Massachusetts.  Ms. Millsearned a B.A. degree from Mount Holyoke College and a Master of Architecturedegree from Harvard University.  Ms.Mills is a member of the Real Estate Finance Association, New England Women inReal Estate, the Mortgage Bankers Association and the Servicing AdvisoryCouncil for Freddie Mac.

 

ITEM 11.                                               EXECUTIVECOMPENSATION

 

The Partnership has no directors or executive officers.

 

ITEM 12.                                               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

 

As of December 31, 2002, no person owned of record or was known by theGeneral Partners to own beneficially more than 5% of the Partnership’s14,655,512 outstanding Limited Partner interests.  The only interests held by management or its affiliates consistof the 2.5% General Partner interest held by Krupp Plus Corporation, the 97.5%General Partner interest held by Mortgage Services Partners Limited Partnershipand the 100 Limited Partner interests (0.0007% of the total outstanding) heldby Krupp Depositary Corporation, an affiliate of the General Partners.

 

Profits and losses from Partnership operations and Distributable CashFlow 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 thePartnership Agreement, net cash proceeds will be distributed first, to theLimited Partners until they have received a return of their total investedcapital, second, to the General Partners until they have received a return oftheir total invested capital, third, 99% to the Limited Partners and 1% to theGeneral Partners until the Limited Partners receive an amount equal to anydeficiency in the 11% cumulative return on their invested capital that existsthrough fiscal years prior to the date of the capital transaction, fourth, tothe class of General Partners until they have received an amount equal to 4% ofall amounts of cash distributed under all capital transactions and fifth, 96%to the Limited Partners and 4% to the General Partners.

 

Upon the occurrence of a Terminating Capital Transaction, as defined inthe Partnership Agreement, the net cash proceeds and winding up of the affairsof the Partnership will be allocated among the Partners first, to each class ofPartners in the amount equal to, or if less than, in proportion to, thepositive balance in the Partner’s capital accounts, second, to the LimitedPartners until they have received a return of their total invested capital,third, to the General Partners until they have received a return of their totalinvested capital, fourth, 99% to the Limited Partners and 1% to the GeneralPartners until the Limited Partners have received any deficiency in the 11%cumulative return on their invested capital that exists through fiscal yearsprior to the date of the capital transaction, fifth, to the General Partnersuntil they have received an amount equal to 4% of all amounts of cashdistributed under all capital transactions and sixth, 96% to the LimitedPartners and 4% to the General Partners.

 

Profits arising from a capital transaction will be allocated in thesame manner as related cash distributions. Losses from a capital transactionwill be allocated 97% to the Limited Partners and 3% to the General Partners.

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

Under the terms of the Partnership Agreement, the General Partners ortheir affiliates are entitled to an asset management fee for the management ofthe Partnership’s business, equal to .75% per annum of the value of thePartnership’s actual and committed mortgage assets, payable quarterly (the“Asset Management Fee”).  The GeneralPartners may also receive an incentive management fee in an amount equal to .3%per annum on the Partnership’s total invested assets provided the Unitholdershave received their specified non-cumulative annual return on their InvestedCapital. Total fees payable to the General Partners for management servicesshall not exceed 10% of Distributable Cash Flow over the life of thePartnership.  During 2002, MortgageServices Partners Limited Partnership, a General Partner, received $158,174related to the Asset Management Fee.

 

Additionally, the Partnership reimburses affiliates of the GeneralPartners for certain costs incurred in connection with maintaining the booksand records of the Partnership the preparation and mailing of financialreports, tax information and other

 

8

----

 

communications to investors and legal fees and expenses.  During 2002, the Berkshire Companies LimitedPartnership and Berkshire Mortgage Finance Limited Partnership, affiliates ofthe General Partners, received a total of $126,236 in reimbursements.

 

During 2002, the General Partners received distributions totaling$51,621 related to their 3% share of Distributable Cash Flow.

 

ITEM 14.                                               CONTROLSAND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Within the 90 days prior to the date of this Annual Report on Form10-K, the Principal Executive Officer and Chief Accounting Officer of KruppPlus Corporation, a General Partner of the Partnership, carried out anevaluation of the effectiveness of the design and operation of thePartnership’s disclosure controls and procedures.  Based upon that evaluation, the Principal Executive Officer andthe Chief Accounting Officer concluded that the Partnership’s disclosurecontrols and procedures were effective as of the date of their evaluation intimely alerting them to material information relating to the Partnershiprequired to be included in this Annual Report on Form 10-K.

 

(b) Changes in Internal Controls

 

There were no significant changes in the Partnership’s internalcontrols or in other factors that could significantly affect such internalcontrols subsequent to the date of the evaluation described in paragraph (a)above.

 

PART IV

 

ITEM 15.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)                                  1.                                       FinancialStatements - see Index to Financial Statements and Schedule included under Item8, Appendix A, page F-2 of this report.

 

2.                                       FinancialStatement Schedule - see Index to Financial Statements and Schedule includedunder Item 8, Appendix A, page F-2 of this report.  All other schedules are omitted as they are not applicable, notrequired or the information is provided in the Financial Statements or theNotes thereto.

 

(b)                                 Reportson Form 8-K

 

During the last quarter of the year ended December 31, 2002, thePartnership did not file any reports on Form 8-K.

 

(c)                                  Exhibits:

 

Number andDescription

Under RegulationS-K

 

The followingreflects all applicable Exhibits required under Item 601 of Regulation S-K:

 

(4)                                  Instrumentsdefining the rights of security holders including indentures:

 

(4.1)                         Amendedand Restated Agreement of Limited Partnership dated as of May 29, 1987 [ExhibitA to Prospectus included in Post Effective Amendment No. 1 of Registrant’sRegistration Statement on Form S-11 dated June 18, 1987 (File No. 33-9889)].*

 

(4.2)                         SecondAmendment to Agreement of Limited Partnership dated as of June 17, 1987[Exhibit 4.6 in Post Effective Amendment No. l of Registrant’s RegistrationStatement on Form S-11 dated June 18, 1987 (File No. 33-9889)].*

 

(4.3)                         SubscriptionAgreement whereby a subscriber agrees to purchase Units and adopts theprovisions of the Amended and Restated Agreement of Limited Partnership[Exhibit D to Prospectus included in Post Effective Amendment No. 1 ofRegistrant’s Registration Statement on Form S-11 dated June 18, 1987 (File No.33-9889)].*

 

9

----

 

(4.4)                         Copy ofAmended Certificate of Limited Partnership filed with the MassachusettsSecretary of State on April 28, 1987. [Exhibit 4.4 in Amendment No. 1 of Registrant’s Registration Statementon Form S-11 dated May 14, 1987 (File No. 33-9889)].*

 

(10)                            MaterialContracts:

 

(10.1)                   Form ofagreement between the Partnership and Krupp Mortgage Corporation.  [Exhibit 10.3 in Amendment No. 1 ofRegistrant’s Registration Statement on Form S-11 dated May 14, 1987 (File No.33-9889)].*

 

(99)                            Other:

 

(99.1)                   PrincipalExecutive Officer Certification pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

 

(99.2)                   ChiefAccounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

 

----

* Incorporated byreference.

+ Filed herewith

 

10

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on the 14thday of March, 2003.

 
|   | KRUPP INSURED PLUS-II LIMITED PARTNERSHIP                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------|
|   |                                                                                                        |
|   | By:                                                                                                         | Krupp Plus Corporation, |
|   |                                                                                                        | a General Partner |
|   |                                                                                                        |
|   | By:                                                                                                         | /s/ Douglas Krupp |   |
|   | Douglas Krupp, President, Co-Chairman (Principal  Executive Officer) and Director of Krupp Plus Corporation |
|   |                                                                                                        |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities indicated, on the 14th day ofMarch, 2003.

 
| **Signatures**       |   | **Title(s)**                                                        |
|----------------------|--------|---------------------------------------------------------------------|
|                 |   |                                                                |
| /s/ Douglas Krupp    |   | President, Co-Chairman (Prin­cipal Executive  Officer) and     |
| Douglas Krupp        |   | Director of Krupp Plus Corporation, a General  Partner              |
|                 |   |                                                                |
| /s/ George Krupp     |   | Co-Chairman (Principal Executive Officer) and  Director of          |
| George Krupp         |   | Krupp Plus Corporation, a General Partner                           |
|                 |   |                                                                |
| /s/ Peter F. Donovan |   | Senior Vice President of Krupp Plus Corporation, a  General Partner |
| Peter F. Donovan     |   |                                                                |
|                 |   |                                                                |
| /s/ Alan Reese       |   | Treasurer and Chief Accounting Officer of Krupp Plus                |
| Alan Reese           |   | Corporation, a General Partner                                      |

 

11

----

 

Certifications

 

I, Douglas Krupp, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Krupp Insured Plus - II Limited Partnership;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to   state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  March  14, 2003 |                         |              |
|-----------------------------|------------------------------|-------------------|
|                        |                         |              |
|                        |                         | /s/ Douglas Krupp |   |   |
|                        | Douglas Krupp                |              |
|                        | Principal Executive  Officer |              |
|                             |                              |                   |  |  |

 

12

----

 

Certifications

 

I, Alan Reese, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Krupp Insured Plus - II Limited Partnership;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to   state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  March  14, 2003 |                      |           |
|-----------------------------|---------------------------|----------------|
|                        |                      |           |
|                        |                      | /s/ Alan Reese |   |   |
|                        | Alan Reese                |           |
|                        | Chief Accounting  Officer |           |
|                             |                           |                |  |  |

 

13

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APPENDIX A

 

KRUPP INSUREDPLUS-II LIMITED PARTNERSHIP

 

(In Liquidation asof December 31, 2002)

 

----

 

FINANCIALSTATEMENTS AND SCHEDULE

ITEM 8 of FORM10-K

 

ANNUAL REPORT TOTHE SECURITIES AND EXCHANGE COMMISSION

For the Year EndedDecember 31, 2002

 

F-1

----

 

KRUPP INSURED PLUS-IILIMITED PARTNERSHIP

 

INDEX TO FINANCIALSTATEMENTS AND SCHEDULES

 

(In Liquidation as ofDecember 31, 2002)

 

----

 
| Report of  Independent Accountants                                                                    |   | F-3        |
|-------------------------------------------------------------------------------------------------------|--------|------------|
|                                                                                                  |   |       |
| Statement  of Net Assets in Liquidation at December 31, 2002 and Balance Sheet at  December 31, 2001  |   | F-4        |
|                                                                                                  |   |       |
| Statements  of Income and Comprehensive Income for the Years Ended December 31, 2002,  2001 and 2000  |   | F-5        |
|                                                                                                  |   |       |
| Statements  of Changes in Partners’ Equity for the Years Ended December 31, 2002, 2001  and 2000 |   | F-6        |
|                                                                                                  |   |       |
| Statements of Cash Flows for  the Years Ended December 31, 2002, 2001 and 2000                        |   | F-7        |
|                                                                                                  |   |       |
| Notes to Financial  Statements                                                                        |   | F-8 - F-14 |

 

All schedules are omitted as they are not applicable or not required,or the information is provided in the financial statements or the notes thereto.

 

F-2

----

 

REPORT OF INDEPENDENT ACCOUNTANTS

 

----

 

To the Partners of Krupp Insured Plus-II Limited Partnership:

 

In our opinion, the financial statements listed in the accompanyingindex present fairly, in all material respects, the financial position of KruppInsured Plus- II Limited Partnership (the “Partnership”) at December 31, 2002and 2001 and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2002 in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Partnership’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

As described in Note B to the financial statements, the Partnership haschanged its basis of accounting as of December 31, 2002, and for the periodssubsequent to December 31, 2002, from the going-concern basis to theliquidation basis of accounting.

 

 

PricewaterhouseCoopers LLP

Boston, Massachusetts

March 14, 2003

 

F-3

----

 

KRUPP INSURED PLUS-IILIMITED PARTNERSHIP

 

STATEMENT OF NET ASSETSIN LIQUIDATION AT DECEMBER 31, 2002

 

AND

 

BALANCE SHEET AT DECEMBER31, 2001

 

----

 
|                                                                                                                        |   | **2002**   |       | **2001**   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| ASSETS                                                                                                                      |   |       |       |       |   |
|                                                                                                                        |   |       |       |       |   |
| Participating  Insured Mortgages (“PIMs”) (Notes C and H)                                                         |   | $          | —     |       | $      | 3,101,005 |   |
|                                                                                                                        |   |       |       |       |   |
| Mortgage-Backed  Securities and insured mortgage (“MBS”) (Notes B, D, H and I)                                    |   | 13,681,978 |       | 30,211,162 |   |
|                                                                                                                        |   |       |       |       |   |
| Total mortgage  investments                                                                                                 |   | 13,681,978 |       | 33,312,167 |   |
|                                                                                                                        |   |       |       |       |   |
| Cash and cash  equivalents (Notes B, C and H)                                                                               |   | 1,339,659  |       | 933,678    |   |
| Interest  receivable and other assets                                                                                       |   | 95,673     |       | 221,124    |   |
|                                                                                                                        |   |       |       |       |   |
| Total assets                                                                                                                |   | $          | 15,117,310 |       | $      | 34,466,969 |   |
|                                                                                                                        |   |       |       |       |   |
| LIABILITIES AND PARTNERS’ EQUITY                                                                                       |   |       |       |       |   |
|                                                                                                                        |   |       |       |       |   |
| Liabilities                                                                                                                 |   | $          | 44,509     |       | $      | 17,875 |   |
|                                                                                                                        |   |       |       |       |   |
| Partners’ equity  (deficit) (Notes A, C and E):                                                                        |   |       |       |       |   |
|                                                                                                                        |   |       |       |       |   |
| Limited Partners  (14,655,512 Limited Partner interests outstanding)                                                        |   | 15,236,577 |       | 34,084,355 |   |
|                                                                                                                        |   |       |       |       |   |
| General Partners                                                                                                            |   | (346,173   | )          | (341,667   | )      |
|                                                                                                                        |   |       |       |       |   |
| Accumulated  comprehensive income (Note B)                                                                                  |   | 182,397    |       | 706,406    |   |
|                                                                                                                        |   |       |       |       |   |
| Total Partners’  equity                                                                                                |   | 15,072,801 |       | 34,449,094 |   |
|                                                                                                                        |   |       |       |       |   |
| Total net assets  in liquidation at December 31, 2002 and total liabilities and Partners’  equity at December 31, 2001 |   | $          | 15,117,310 |       | $      | 34,466,969 |   |

 

The accompanying notesare an integralpart of the financial statements.

 

F-4

----

 

KRUPP INSURED PLUS-IILIMITED PARTNERSHIP

 

STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME

 

(In Liquidation as ofDecember 31, 2002)

 

For the Years EndedDecember 31, 2002, 2001 and 2000

 

----

 
|                                                         |   | **2002**  |      | **2001**  |   | **2000**  |   |
|--------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
|                                                         |   |      |      |      |   |      |   |
| Revenues:                                                    |   |      |      |      |   |      |   |
| Interest income  - PIMs:                                     |   |      |      |      |   |      |   |
| Basic interest                                               |   | $         | 183,038   |      | $      | 613,152   |   | $ | 1,360,247 |   |
| Participation  interest                                      |   | —    |      | 30,769    |   | —    |   |
| Interest income  - MBS                                       |   | 1,569,075 |      | 2,021,867 |   | 1,685,246 |   |
| Other interest  income                                       |   | 309,322   |      | 124,846   |   | 474,953   |   |
|                                                         |   |      |      |      |   |      |   |
| Total revenues                                               |   | 2,061,435 |      | 2,790,634 |   | 3,520,446 |   |
|                                                         |   |      |      |      |   |      |   |
| Expenses:                                                    |   |      |      |      |   |      |   |
| Asset management  fee to an affiliate (Note F)               |   | 158,174   |      | 261,650   |   | 299,983   |   |
| Expense reimbursement  to affiliates (Note F)                |   | 126,236   |      | 119,166   |   | 125,209   |   |
| Amortization of  prepaid fees and expenses                   |   | —    |      | 65,905    |   | 122,275   |   |
| General and  administrative                                  |   | 206,526   |      | 172,342   |   | 202,601   |   |
|                                                         |   |      |      |      |   |      |   |
| Total expenses                                               |   | 490,936   |      | 619,063   |   | 750,068   |   |
|                                                         |   |      |      |      |   |      |   |
| Net income  (Notes E and G)                                  |   | 1,570,499 |      | 2,171,571 |   | 2,770,378 |   |
|                                                         |   |      |      |      |   |      |   |
| Other  Comprehensive Income:                                 |   |      |      |      |   |      |   |
|                                                         |   |      |      |      |   |      |   |
| Net change in  unrealized gain on MBS                        |   | (524,009  | )         | 513,743   |   | 87,582    |   |
|                                                         |   |      |      |      |   |      |   |
| Total  Comprehensive Income                                  |   | $         | 1,046,490 |      | $      | 2,685,314 |   | $ | 2,857,960 |   |
|                                                         |   |      |      |      |   |      |   |
| Allocation of  net income (Notes E and G.):                  |   |      |      |      |   |      |   |
|                                                         |   |      |      |      |   |      |   |
| Limited Partners                                             |   | $         | 1,523,384 |      | $      | 2,106,424 |   | $ | 2,687,267 |   |
|                                                         |   |      |      |      |   |      |   |
| Average net  income per Limited Partner                      |   |      |      |      |   |      |   |
| Interest  (14,655,512 Limited Partner interests outstanding) |   | $         | .10       |      | $      | .14       |   | $ | .18 |   |
|                                                         |   |      |      |      |   |      |   |
| General Partners                                             |   | $         | 47,115    |      | $      | 65,147    |   | $ | 83,111 |   |

 

The accompanying notesare an integralpart of the financial statements.

 

F-5

----

 

KRUPP INSURED PLUS-IILIMITED PARTNERSHIP

 

STATEMENTS OF CHANGES INPARTNERS’ EQUITY

 

(In Liquidation as ofDecember 31, 2002)

 

For the Years EndedDecember 31, 2002, 2001 and 2000

 

----

 
|                              |   | **Limited  Partners** |       | **General  Partners** |   | **Accumulated  Comprehensive  Income** |   | **Total  Partners’  Equity** |    |
|-----------------------------------|--------|-----------------------|------------|-----------------------|--------|----------------------------------------|--------|-----------------------------------|---------|
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Balance at  December 31, 1999     |   | $                     | 60,360,347 |                  | $      | (323,383                               | )      | $                                 | 105,081 |   | $ | 60,142,045 |   |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Net income                        |   | 2,687,267             |       | 83,111                |   | —                                 |   | 2,770,378                         |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Quarterly  distributions          |   | (5,862,204            | )          | (97,176               | )      | —                                 |   | (5,959,380                        | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Special  distributions            |   | (14,802,066           | )          | —                |   | —                                 |   | (14,802,066                       | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Change in  unrealized gain on MBS |   | —                |       | —                |   | 87,582                                 |   | 87,582                            |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Balance at  December 31, 2000     |   | 42,383,344            |       | (337,448              | )      | 192,663                                |   | 42,238,559                        |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Net income                        |   | 2,106,424             |       | 65,147                |   | —                                 |   | 2,171,571                         |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Quarterly  distributions          |   | (5,862,204            | )          | (69,366               | )      | —                                 |   | (5,931,570                        | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Special  distributions            |   | (4,543,209            | )          | —                |   | —                                 |   | (4,543,209                        | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Change in  unrealized gain on MBS |   | —                |       | —                |   | 513,743                                |   | 513,743                           |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Balance at  December 31, 2001     |   | 34,084,355            |       | (341,667              | )      | 706,406                                |   | 34,449,094                        |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Net income                        |   | 1,523,384             |       | 47,115                |   | —                                 |   | 1,570,499                         |    |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Quarterly  distributions          |   | (2,931,103            | )          | (51,621               | )      | —                                 |   | (2,982,724                        | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Special  distributions            |   | (17,440,059           | )          | —                |   | —                                 |   | (17,440,059                       | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Change in  unrealized gain on MBS |   | —                |       | —                |   | (524,009                               | )      | (524,009                          | )       |
|                              |   |                  |       |                  |   |                                   |   |                              |    |
| Balance at  December 31, 2002     |   | $                     | 15,236,577 |                  | $      | (346,173                               | )      | $                                 | 182,397 |   | $ | 15,072,801 |   |

 

The accompanying notesare an integralpart of the financial statements.

 

F-6

----

 

KRUPP INSURED PLUS-IILIMITED PARTNERSHIP

 

STATEMENTS OF CASH FLOWS

 

(In Liquidation as ofDecember 31, 2002)

 

For the Years EndedDecember 31, 2002, 2001 and 2000

 

----

 
|                                                                               |   | **2002**    |      | **2001**    |   | **2000**    |   |
|------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|-------------|--------|
| Operating  activities:                                                             |   |        |      |        |   |        |   |
| Net income                                                                         |   | $           | 1,570,499 |        | $      | 2,171,571   |   | $ | 2,770,378 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |        |      |        |   |        |   |
| Amortization of  prepaid fees and expenses                                         |   | —      |      | 65,905      |   | 122,275     |   |
| Premium  amortization                                                              |   | —      |      | 22,153      |   | —      |   |
| Changes in  assets and liabilities:                                                |   |        |      |        |   |        |   |
| Decrease in  interest receivable and other assets                                  |   | 125,451     |      | 54,467      |   | 102,695     |   |
| Increase (decrease)  in liabilities                                                |   | 26,634      |      | (14         | )      | (2,059      | )      |
|                                                                               |   |        |      |        |   |        |   |
| Net cash  provided by operating activities                                         |   | 1,722,584   |      | 2,314,082   |   | 2,993,289   |   |
|                                                                               |   |        |      |        |   |        |   |
| Investing  activities:                                                             |   |        |      |        |   |        |   |
| Principal  collections on PIMs                                                     |   | 3,101,005   |      | 119,842     |   | 8,682,792   |   |
| Principal collections  on MBS                                                      |   | 16,005,175  |      | 5,848,823   |   | 1,117,892   |   |
|                                                                               |   |        |      |        |   |        |   |
| Net cash  provided by investing activities                                         |   | 19,106,180  |      | 5,968,665   |   | 9,800,684   |   |
|                                                                               |   |        |      |        |   |        |   |
| Financing  activities:                                                             |   |        |      |        |   |        |   |
| Quarterly  distributions                                                           |   | (2,982,724  | )         | (5,931,570  | )      | (5,959,380  | )      |
| Special  distributions                                                             |   | (17,440,059 | )         | (4,543,209  | )      | (14,802,066 | )      |
|                                                                               |   |        |      |        |   |        |   |
| Net cash used  for financing activities                                            |   | (20,422,783 | )         | (10,474,779 | )      | (20,761,446 | )      |
|                                                                               |   |        |      |        |   |        |   |
| Net increase  (decrease) in cash and equivalents                                   |   | 405,981     |      | (2,192,032  | )      | (7,967,473  | )      |
|                                                                               |   |        |      |        |   |        |   |
| Cash and cash  equivalents, beginning of year                                      |   | 933,678     |      | 3,125,710   |   | 11,093,183  |   |
|                                                                               |   |        |      |        |   |        |   |
| Cash and cash  equivalents, end of year                                            |   | $           | 1,339,659 |        | $      | 933,678     |   | $ | 3,125,710 |   |
|                                                                               |   |        |      |        |   |        |   |
| Supplemental  disclosure of non-cash investing activities:                         |   |        |      |        |   |        |   |
| Reclassification  of investment in a PIM to MBS                                    |   | $           | —    |        | $      | 14,320,749  |   | $ | — |   |
|                                                                               |   |        |      |        |   |        |   |
| Non cash  activities:                                                              |   |        |      |        |   |        |   |
| Increase  (decrease) in fair value of MBS                                          |   | $           | (524,009  | )           | $      | 513,743     |   | $ | 87,582 |   |

 

The accompanying notesare an integralpart of the financial statements

 

F-7

----

 

KRUPP INSURED PLUS-IILIMITED PARTNERSHIP

 

NOTES TO FINANCIAL STATEMENTS

 

(In Liquidation as ofDecember 31, 2002)

 

----

 

A.           Organization

 

Krupp Insured Plus-II Limited Partnership (the“Partnership”) was formed on October 29, 1986 by filing a Certificate ofLimited Partnership in The Commonwealth of Massachusetts.  The Partnership was organized for thepurpose of investing in multi-family loans and mortgage backed securities.  The Partnership issued all of the GeneralPartner Interests to Krupp Plus Corporation and Mortgage Services PartnersLimited Partnership in exchange for capital contributions aggregating$3,000.  The Partnership terminates onDecember 31, 2026, unless terminated earlier upon the occurrence of certainevents as set forth in the Partnership Agreement.

 

The Partnership commenced the public offering ofLimited Partner interests on May 29, 1987 and completed its public offeringhaving sold 14,655,412 Limited Partner interests for $292,176,381 net ofpurchase volume discounts of $931,859 as of May 27, 1988.  In addition, Krupp Depositary Corporationowns one hundred Limited Partner interests.

 

B.             SignificantAccounting Policies

 

The Partnership uses the following accounting policiesfor financial reporting purposes, which may differ in certain respects fromthose used for federal income tax purposes (Note G).

 

Basis of Presentation

 

The accompanying financial statements have beenprepared on the accrual basis of accounting in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).

 

As a result of the payoff of the Denrich ApartmentsPIM, the Partnership is in the process of winding up its business, which itexpects to complete in the first half of 2003. The Partnership will sell itsremaining MBS and then make a Terminating Capital Transaction distribution tothe partners. In connection therewith, the Partnership has changed its basis ofaccounting as of December 31, 2002 from the going-concern basis to theliquidation basis of accounting. The liquidation basis of accounting requiresthat assets and liabilities be stated at their estimated net realizable valueand that estimated costs of liquidating the Partnership be provided to theextent that they are reasonably determinable. The Partnership estimates thatthe costs to liquidate will be approximately $2,500, which primarily relates tofinal tax preparation work including the issuance of final K-1 statements tothe partners.

 

MBS

 

The Partnership, in accordance with FinancialAccounting Standards Board’s Statement 115, “Accounting for Certain Investmentsin Debt and Equity Securities” (“FAS 115”), classifies its MBS portfolio asavailable-for-sale.  The Partnershipclassifies its MBS portfolio as available-for-sale as it intends to sell theremaining MBS portfolio in order to close out the Partnership.  As such the Partnership carries its MBS atfair market value and reflects any unrealized gains (losses) as a separatecomponent of Partners’ Equity. The Partnership amortizes purchase premiums ordiscounts over the life of the underlying mortgages using the effectiveinterest method.

 

The Partnership also holds a Federal HousingAdministration (“FHA”) insured mortgage which is classified as MBS.  The Partnership holds this loan at amortizedcost and does not establish loan loss reserves on this investment as it isfully insured by the FHA.

 

Cash and Cash Equivalents

 

The Partnership includes all short-term investmentswith maturities of three months or less at the date of acquisition in cash andcash equivalents.  The Partnershipinvests its cash primarily in commercial paper and money market funds with acommercial bank and has not experienced any loss to date on its invested cash.

 

F-8

----

 

Income Taxes

 

The Partnership is not liable for federal or stateincome taxes because Partnership income is allocated to the partners for incometax purposes. If the Partnership’s tax returns are examined by the InternalRevenue Service or state taxing authority and such an examination results in achange in Partnership taxable income, such change will be reported to thepartners.

 

Estimates and Assumptions

 

The preparation of financial statements in accordancewith GAAP requires management to make estimates and assumptions that affect thereported amount of assets and liabilities, contingent assets and liabilitiesand revenues and expenses during the period. Key estimates include the unrealized gain on MBS investments and theestimate of liquidation expenses. Actual results could differ from those estimates.

 

C.             PIMs

 

On May 15, 2002, the Partnership received $3,084,121representing the principal proceeds on the first mortgage loan from the DenrichApartments PIM.  In addition, thePartnership received $100,625 from an affiliate of the Partnership tocompensate the Partnership for its inability to collect the unpaid interestthat resulted from the interest rate reduction agreement entered into in June 1995.  On June 19, 2002, the Partnership paid aspecial distribution of $.22 per Limited Partner interest from the principalproceeds received.

 

During May 2001, the Partnership received $30,769 fromthe borrowers of the Richmond Park PIM as a settlement to release the loan’sparticipation features.  The propertywas not generating sufficient cash flow to pay any participation from propertyoperations nor did it have sufficient value to meet the threshold to pay any participationbased on value if the property was sold or refinanced.  The borrowers asked for a release of theparticipation features while keeping the insured first mortgage in place untilthe property turned around.  The GeneralPartners agreed to this request in return for the settlement because there wasno expectation that the Partnership would be entitled to any participationproceeds based on the property’s physical condition.  Upon this settlement, the insured first mortgage loan on RichmondPark was reclassified from a PIM to a MBS as the only remaining portion of theinvestment was a GNMA MBS.  ThePartnership also reclassified this investment as available-for-sale concurrentwith the release of the participation feature. The Partnership continued to receive the scheduled principal and interestpayments on the first mortgage until it was paid in full (See Note D).

 

On March 30, 2000, the Partnership paid a specialdistribution of $.58 per Limited Partner interest from the prepayment proceedsreceived during February 2000 on the Greenhouse Apartments PIM in the amount of$8,428,984.  The underlying property wasforeclosed on by the first mortgage lender during January 1999.  The Partnership continued to receive itsfull principal and basic interest payments due on the PIM while the underlyingmortgage was in default because those payments were guaranteed by GNMA. ThePartnership did not receive any participation interest from this transaction.

 

On January 11, 2000, the Partnership paid a specialdistribution of $.43 per Limited Partner interest from the Saratoga ApartmentsPIM prepayment proceeds received in December 1999 in the amount of$6,204,960.  The underlying propertyvalue had not increased sufficiently enough to meet the criteria for the Partnershipto earn any participation interest.

 

The Partnership’s PIMs consisted of the following atDecember 31, 2002 and 2001:

 
|                                 |   |                    |      | **Investment  Basis at  December 31,** |     |
|--------------------------------------|--------|-------------------------|-----------|----------------------------------------|----------|
|                                 |   | **OriginalFace Amount** |      |                                   |
| **GNMA**                             |   |                    | **2002**  |                                   | **2001** |   |
| Denrich  Apartments Philadelphia, PA |   | $                       | 3,500,000 |                                   | $        | — |   | $ | 3,101,005 |   |
|                                      |        |                         |           |                                        |          |  |  |  |  |  |

 

F-9

----

 

A reconciliation of thecarrying value of PIMs for each of the three years in the period ended December31, 2002 is as follows:

 
|                                   |   | **2002**   |      | **2001**    |   | **2000**   |   |
|----------------------------------------|--------|------------|-----------|-------------|--------|------------|--------|
|                                   |   |       |      |        |   |       |   |
| Balance at  beginning of period        |   | $          | 3,101,005 |        | $      | 17,541,596 |   | $ | 26,224,388 |   |
|                                   |   |       |      |        |   |       |   |
| Deductions  during period:             |   |       |      |        |   |       |   |
| Prepayments and  principal collections |   | (3,101,005 | )         | (119,842    | )      | (8,682,792 | )      |
| Reclass to MBS                         |   | —     |      | (14,320,749 | )      | —     |   |
|                                   |   |       |      |        |   |       |   |
| Balance at end  of period              |   | $          | —    |        | $      | 3,101,005  |   | $ | 17,541,596 |   |

 

D.            MBS

 

The Partnership received a payoff of the Richmond ParkApartments MBS on June 17, 2002 for $14,073,943.  On August 28, 2002, the Partnership paid a special distributionof $.97 per Limited Partner interest from the principal proceeds received.

 

During May 2001, the Partnership received a payoff ofthe Orchard Landing MBS in the amount of $4,440,315.  On July 18, 2001 the Partnership paid a special distribution of$.31 per Limited Partner interest from the principal proceeds.

 

At December 31, 2002, the Partnership’s MBS portfoliohad an amortized cost of $2,112,265 and unrealized gains of $182,397.  At December 31, 2002, the Partnership’s FHAinsured mortgage (Hampton Place) had an amortized cost of $11,387,316 whichwas  the same as its estimated fairvalue.  At December 31, 2001, thePartnership’s MBS portfolio had an amortized cost of $17,982,354 and unrealizedgains of $706,406.  At December 31,2001, the Partnership’s insured mortgage had an amortized cost of $11,522,402and an unrealized gain of $363,763.  Theportfolio has maturities ranging from 2008 to 2028.

 

| **Maturity Date** |   | **Fair Value** |       | **Unrealized  Gain** |   |
|-------------------|--------|----------------|------------|----------------------|--------|
| 2003 - 2007       |   | $              | —     |                 | $      | — |   |
| 2008 - 2012       |   | 776,955        |       | 80,584               |   |
| 2013 - 2028       |   | 12,905,023     |       | 101,813              |   |
|              |   |           |       |                 |   |
| Total             |   | $              | 13,681,978 |                 | $      | 182,397 |   |

 

E.              Partners’Equity

 

Profits and losses from Partnership operations andDistributable Cash Flow are allocated 97% to the Unitholders and CorporateLimited Partner (the “Limited Partners”) and 3% to the General Partners.

 

Upon the occurrence of a Capital Transaction, asdefined in the Partnership Agreement, net cash proceeds will be distributedfirst, to the Limited Partners until they have received a return of their totalInvested Capital, second, to the General Partners until they have received a returnof their total Invested Capital, third, 99% to the Limited Partners and 1% tothe General Partners until the Limited Partners receive an amount equal to anydeficiency in the 11% cumulative return on their Invested Capital that existsthrough fiscal years prior to the date of the Capital Transaction, fourth, tothe class of General Partners until they have received an amount equal to 4% ofall 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 Transactionwill be allocated in the same manner as related cash distributions. Losses froma Capital Transaction will be allocated 97% to the Limited Partners and 3% tothe General Partners.

 

F-10

----

 

Upon the occurrence of a Terminating CapitalTransaction, as defined in the Partnership Agreement profits from theTerminating Capital Transaction shall be allocated first to the LimitedPartners and General Partners to the extent of any then existing negativeaccount balances or if in an amount insufficient to reduce those negativecapital account balances to zero, then in proportion to any negative accountbalances, second, to the Limited Partners until their Capital Account is equalto their Invested Capital, third, to the General Partners until their CapitalAccount is equal to their Invested Capital, fourth, 99% to the Limited Partnersand 1% to the General Partners until the Limited Partners have been allocatedprofits equal to the Cumulative Return on Invested Capital less the sum of allamounts of cash distributed to the Limited Partners from Distributable CashFlow and from Capital Transaction Proceeds, fifth, to the General Partnersuntil they have received profits whenever allocated pursuant to Section 8.1(b)Third and Fourth and Section 8.1(c) Fourth equals 4% of all amounts distributedof the Net Cash Proceeds of the Terminating Capital Transaction and all otherCapital Transactions whenever occurring, and sixth, any remaining profits shallbe allocated 96% to the Limited Partners and 4% to the General Partners.

 

Losses from a Terminating Capital Transaction shall beallocated to the Limited Partners and the General Partners to the extent of,and any excess in proportion to, the positive balances in their CapitalAccounts.  The net cash proceeds of aTerminating Capital Transaction will be allocated among the Partners first, toeach class of Partners in the amount equal to, or if less than, in proportion to,the positive balance in the Partner’s capital accounts, second, to the LimitedPartners until they have received a return of their total Invested Capital,third, to the General Partners until they have received a return of their totalInvested Capital, fourth, 99% to the Limited Partners and 1% to the GeneralPartners until the Limited Partners have received to any deficiency in the 11%cumulative return on their Invested Capital that exists through fiscal yearsprior to the date of the Terminating Capital Transaction, fifth, to the GeneralPartners until they have received an amount equal to 4% of all amounts of cashdistributed under all capital transactions and sixth, 96% to the LimitedPartners and 4% to the General Partners.

 

Upon the dissolution and termination of thePartnership, the General Partners will contribute to the Partnership an amountequal to the lesser of the deficit balances in their capital accounts or theexcess of 1.01% of the total Capital Contributions of the Limited Partners overthe amount of capital previously contributed by the General Partners.

 

During 2002, 2001, and 2000 the Partnership madequarterly distributions totaling $.20, $.40 and $.40 per Limited Partnerinterest, respectively.  The Partnershipmade special distributions of $1.19, $.31 and $1.01 per Limited Partnerinterest in 2002, 2001 and 2000, respectively.

 

F-11

----

 

As of December 31, 2002, the following cumulativepartner contributions and allocations have been made since the inception of thePartnership:

 
|                          |   | **Unitholders** |             | **Corporate  Limited  Partner** |   | **General  Partners** |   | **Accumulated  Comprehensive  Income** |      | **Total**    |   |
|-------------------------------|--------|-----------------|------------------|---------------------------------|--------|-----------------------|--------|----------------------------------------|-----------|--------------|--------|
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Capital  contributions        |   | $               | 292,176,381      |                            | $      | 2,000                 |   | $                                      | 3,000     |         | $      | — |   | $ | 292,181,381 |   |
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Syndication  costs            |   | (15,580,734     | )                | —                          |   | —                |   | —                                 |      | (15,580,734  | )      |
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Quarterly  distributions      |   | (252,681,622    | )                | (1,760                          | )      | (5,950,549            | )      | —                                 |      | (258,633,931 | )      |
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Special  distributions        |   | (189,787,582    | )                | (1,295                          | )      | —                |   | —                                 |      | (189,788,877 | )      |
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Net income                    |   | 181,109,926     |             | 1,263                           |   | 5,601,376             |   | —                                 |      | 186,712,565  |   |
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Unrealized gains  on MBS      |   | —          |             | —                          |   | —                |   | 182,397                                |      | 182,397      |   |
|                          |   |            |             |                            |   |                  |   |                                   |      |         |   |
| Balance at  December 31, 2002 |   | $               |  15,236,369 |                            | $      |  208             |   | $                                      | (346,173) |         | $      |  182,397 |   | $ | 15,072,801 |   |

 

F.              RelatedParty Transactions

 

Under the terms of the Partnership Agreement, theGeneral Partners or their affiliates are entitled to an asset management feefor the management of the Partnership’s business, equal to .75% per annum ofthe value of the Partnership’s actual and committed mortgage assets, payablequarterly.   The General Partners mayalso receive an incentive management fee in an amount equal to .3% per annum onthe Partnership’s total invested assets provided the Unitholders have receivedtheir specified non-cumulative annual return on their Invested Capital. Totalfees payable to the General Partners for management services shall not exceed10% of Distributable Cash Flow over the life of the Partnership.  Additionally, the Partnership reimbursesaffiliates of the General Partners for certain costs incurred in connectionwith maintaining the books and records of the Partnership, the preparation andmailing of financial reports, tax information and other communications toinvestors and legal fees and expenses.

 

G.             FederalIncome Taxes

 

The reconciliation of the income reported in theaccompanying financial statements with the income reported in the Partnership’s2002 federal income tax return is as follows:

 
| Net income per statement of income                                                |   | $        | 1,570,499 |   |
|-----------------------------------------------------------------------------------|--------|----------|-----------|--------|
|                                                                              |   |     |      |
| Less:  Book to tax difference for amortization of  prepaid fees and expenses |   | (889,700 | )         |
|                                                                              |   |     |      |
| Net income for  federal income tax purposes                                       |   | $        | 680,799   |   |

 

F-12

----

 

The allocation of the 2002 net income for federalincome tax purposes is as follows:

 
|                       |   | **Net  Income** |    |
|----------------------------|--------|-----------------|---------|
|                       |   |            |    |
| Unitholders                |   | $               | 660,370 |   |
| Corporate  Limited Partner |   | 5               |    |
| General Partners           |   | 20,424          |    |
|                       |   |            |    |
|                       |   | $               | 680,799 |   |

 

For the years ended December 31, 2002, 2001 and 2000the average per unit net income to the Unitholders for federal income taxpurposes was $.05, $.13 and $.15, respectively.

 

The basis of the Partnership’s assets for financialreporting purposes was greater than its tax basis by approximately $183,000 atDecember 31, 2002 and was less than its tax basis by approximately $183,000 atDecember 31, 2001.  The basis of thePartnership’s liabilities for financial reporting purposes were the same as itstax basis at December 31, 2002 and 2001, respectively.

 

H.            FairValue Disclosures of Financial Instruments

 

The Partnership uses the following methods andassumptions to estimate the fair value of each class of financial instruments:

 

Cash and Cash Equivalents

 

The carrying amount approximates fair value because ofthe short maturity of those instruments.

 

MBS

 

The Partnership estimates the fair value of MBS basedon quoted market prices while it estimates the fair value of the insuredmortgage based on quoted prices of MBS with similar interest rates. Based onthe estimated fair value determined using these methods and assumptions, thePartnership’s investments in MBS had gross unrealized gains of approximately$182,000 and $1,070,000 at December 31, 2002 and 2001, respectively.

 

PIMs

 

As there was no active trading market for theseinvestments, Management estimated the fair value of the PIMs using quotedmarket prices of MBS having a similar interest rate.  Management did not include any participation interest in thePartnership’s estimated fair value arising from the properties as Managementdid not believe it could predict the time of realization of the feature withany certainty.  Based on the estimatedfair value determined using these methods and assumptions, the Partnership’s investmentsin PIMs had gross unrealized gains of approximately $146,000 at December 31,2001.

 

F-13

----

 

At December 31, 2002 and 2001, the estimated fairvalues of the Partnership’s financial instruments were as follows (amountsrounded to nearest thousand):

 
|                       |   | **2002**        |   | **2001**            |   |
|----------------------------|--------|-----------------|--------|---------------------|--------|
|                       |   | **Fair  Value** |   | **Carrying  Value** |   | **Fair  Value** |   | **Carrying  Value** |   |
|                       |   |            |   |                |   |   |   |   |   |
| Cash and cash  equivalents |   | $               | 1,340  |                | $      | 1,340 |   | $ | 934 |   | $ | 934 |   |
|                       |   |            |   |                |   |   |   |   |   |
| MBS and insured  mortgages |   | 13,682          |   | 13,682              |   | 30,575 |   | 30,211 |   |
|                       |   |            |   |                |   |   |   |   |   |
| PIMs                       |   | —          |   | —              |   | 3,247 |   | 3,101 |   |
|                       |   |            |   |                |   |   |   |   |   |
| Total                      |   | $               | 15,022 |                | $      | 15,022 |   | $ | 34,756 |   | $ | 34,246 |   |

 

I.                 SubsequentEvent

 

The Partnership received a payoff of the Hampton Placeinsured mortgage on March 5, 2003 for $11,363,788.  The Partnership also received a prepayment premium of $113,638from this payoff.  The Partnershipanticipates payment of a special distribution of $.79 per Limited Partnerinterest from the proceeds received to be paid in the first half of 2003.

 

F-14

----