UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-14378 Krupp Institutional Mortgage Fund Limited Partnership Massachusetts 04-2860302 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (617) 423-2233 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP BALANCE SHEETS ASSETS September 30, December 31, 1994 1993 Mortgage notes receivable, net of loan loss reserve of $12,024,000 in 1994 and 1993 (Notes 2 and 3) $16,328,617 $16,346,355 Cash and cash equivalents 1,078,572 992,640 Accrued interest receivable - mortgage notes, net of reserve for uncollectible interest of $7,090,550 and $5,549,030, respectively (Note 3) 250,117 25,880 Other interest receivable 2,658 2,613 Total assets $17,659,964 $17,367,488 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 16,604 $ 5,887 Partners' equity (Note 4) 17,643,360 17,361,601 Total liabilities and partners' equity $17,659,964 $17,367,488 The accompanying notes are an integral part of the financial statements. -2- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended September 30, September 30, 1994 1993 1994 1993 Interest income: Mortgage notes receivable (Notes 2 and 3) $274,461 $218,389 $762,453 $679,909 Cash equivalents and short-term investments 7,906 9,124 26,339 37,817 Total interest income 282,367 227,513 788,792 717,726 Expenses: Expense reimbursements to affiliates 26,835 26,835 80,506 79,794 General and administrative 12,881 11,401 46,994 51,449 Total expenses 39,716 38,236 127,500 131,243 Net income $242,651 $189,277 $661,292 $586,483 Allocation of net income (Note 4): Per Unit of Limited Partner Interest (30,059 Units outstanding) $ 7.99 $ 6.23 $ 21.78 $ 19.32 General Partners $ 2,427 $ 1,893 $ 6,613 $ 5,865 The accompanying notes are an integral part of the financial statements. -3- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1994 1993 Operating activities: Net income $ 661,292 $ 586,483 Adjustments to reconcile net income to net cash provided by operating activities: Increase in other interest receivable (45) (77,316) Increase in accrued interest receivable - mortgage notes (224,237) (70,770) Increase (decrease) in liabilities 10,717 (4,298) Net cash provided by operating activities 447,727 434,099 Investing activity: Decrease (increase) in mortgage note receivable 17,738 (993,030) Financing activity: Distributions (379,533) (379,533) Net increase (decrease) in cash and cash equivalents 85,932 (938,464) Cash and cash equivalents, beginning of period 992,640 1,945,829 Cash and cash equivalents, end of period $1,078,572 $ 1,007,365 The accompanying notes are an integral part of the financial statements. -4- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (1) Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of The Krupp Corporation and The Krupp Company Limited Partnership-III ("Krupp Co.-III"), the General Partners of Krupp Institutional Mortgage Fund Limited Partnership (the "Partnership"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Financial Statements in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1993 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners of the Partnership, the accompanying unaudited financial statements reflect all adjustments necessary to present fairly the Partnership's financial position as of September 30, 1994, its results of operations for the three and nine months ended September 30, 1994 and 1993, and cash flows for the nine months ended September 30, 1994 and 1993. The results of operations for the three and nine months ended September 30, 1994 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. Certain prior year balances have been reclassified to conform with current year financial statement presentation. (2)Krupp Equity Limited Partnership ("KELP") Condensed financial statements of KELP are as follows: CONDENSED BALANCE SHEETS ASSETS September 30, December 31, Property at cost (A) $ 30,603,690 $ 38,601,268 Accumulated depreciation (9,118,332) (10,404,344) 21,485,358 28,196,924 Other assets 998,898 534,682 Total assets $ 22,484,256 $ 28,731,606 Continued -5- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued (2) Krupp Equity Limited Partners, Continued LIABILITIES AND PARTNERS' DEFICIT September 30, December 31, 1994 1993 Mortgage notes payable to KIMF $ 28,352,617 $ 28,370,355 Mortgage notes payable to third parties 7,441,293 10,824,303 Notes payable to an affiliate 300,000 300,000 Notes payable - 61,250 Due to affiliates 1,043,503 669,191 Accrued interest and penalties payable to KIMF 7,260,657 5,574,900 Accrued interest to affiliates 267,058 249,412 Other liabilities 583,756 615,317 Total liabilities 45,248,884 46,664,728 Partners' deficit (22,764,628) (17,933,122) Total liabilities and partners' deficit $ 22,484,256 $ 28,731,606 CONDENSED STATEMENTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended September 30, September 30, 1994 1993 1994 1993 Revenues $ 1,127,779 $1,104,949 $ 3,408,572 $ 3,899,555 Property operating expenses (624,826) (529,382) (1,864,330) (1,909,854) Operating income 502,953 575,567 1,544,242 1,989,701 Depreciation and amortization (319,230) (311,652) (953,472) (1,163,759) Interest (1,056,147) (1,050,833) (3,115,703) (3,290,096) Net loss before gain/(loss) on sale of Shadow Valley and NOC Mall (A) (872,424) (786,918) (2,524,933) (2,464,154) Gain on sale of Shadow Valley/(loss) on sale of NOC Mall (2,306,573) 2,376,362 (2,306,573) 2,376,362 Net income (loss) $(3,178,997) $1,589,444 $(4,831,506) $ (87,792) (A) On September 30, 1994, NOC Mall was sold to an unaffiliated third party for $2,340,000. The proceeds were used to satisfy the obligation to the first mortgage note holder. The release by the Partnership of NOC Mall as collateral for the Participating Notes does not constitute debt forgiveness. Continued -6- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued (3) Accrued Interest Reserves and Cash Flow Payments For 1994, The Partnership has recorded additional reserves of $1,541,520 for uncollectible interest on the mortgage notes receivable. The current interest receivable of $250,117 due on the Participating Notes will be collected in the fourth quarter. The mortgage note and interest reserves are recorded annually based on third party appraisals and management's current estimates of the underlying property values The Partnership has waived for 90 days the right to accelerate payment of the Participating Notes and has received a payment equal to cash flow net of operating and administrative expenses and first mortgage obligations. This waiver is effective only with respect to the payment due October 1, 1994, and KIMF reserves its rights to take any action to which it is entitled in the event any future event of default occurs. Since 1991, the management fee to an affiliate has been subordinated to any and all indebtedness of KELP. The General Partners of KELP have arranged for a waiver of such fees since that time. (4) Summary of Change in Partners' Equity A summary of changes in partners' equity (deficit) for the nine months ended September 30, 1994 is as follows: Total Limited General Partners' Partners Partners Equity Balance at December 31, 1993 $17,487,588 $(125,987) $17,361,601 Net income 654,679 6,613 661,292 Distributions (371,942) (7,591) (379,533) Balance at September 30, 1994 $17,770,325 $(126,965) $17,643,360 -7- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Partnership has sufficient liquidity to meet its operating needs. However, the Partnership's ability to pay distributions is primarily dependent on KELP's interest payments on the Participating Notes resulting from the cash flow of the underlying properties. The Partnership currently pays distributions at a fluctuating rate based on those interest payments. The General Partners do not foresee the potential for any significant increases in cash flows from KELP because of KELP's inability to reposition its retail properties to attract higher paying tenants. The General Partners anticipate that these cash flow payments will continue, but there is no assurance that KELP will be able to continue payments in the future. The NOC Mall mortgage matured on June 30, 1993. Prior to loan maturity, KELP's management began negotiations with the lender to restructure the terms of NOC Mall's mortgage note payable. Due to a deterioration of operations over the past few years, there have been insufficient funds available for the capital improvements needed to maintain the property's competitiveness. As a result, KELP had reduced its payment to the first mortgage note holder to cash flow payments based upon the property's cash flow. KELP continued to make cash flow payments as reported in the past while negotiating with the lender. The negotiations resulted in an agreement with the lender to market the property for sale, and on June 2, 1994, KELP entered into a purchase and sale agreement with an unaffiliated third party. NOC Mall was subsequently sold on September 30, 1994 for $2,340,000 and proceeds from the sale were used to satisfy the first mortgage note payable. The release by the Partnership of NOC Mall as collateral for the Participating Notes does not constitute debt forgiveness. Distributable Cash from Operations Distributable Cash From Operations, as defined by Section 5.01 of the Partnership Agreement, is equivalent to the net income of the Partnership, excluding the $80,000 receivable for the release of NOC Mall as collateral to the participating notes. KIMF's Results of Operations Interest earned on cash equivalents and short-term investments for the nine months ended September 30, 1994 has decreased due to the purchase of the Northeast Plaza first mortgage note. This is more than offset because the mortgage note purchased bears interest at 10% while cash investments are yielding approximately 4% to 4.5%. Mortgage interest income for the nine months ended September 30, 1994 as compared to the same period in 1993 is slightly higher. This is primarily due to higher cash flow payments from the KELP properties. In addition, the Partnership has recorded a receivable of approximately $80,000 as consideration for the release of NOC Mall as collateral to the Participating Notes. Mortgage interest income for 1993 also included $75,000 received upon the sale of Shadow Valley. Economic occupancy levels for both residential and commercial properties owned by KELP remained fairly stable from 1993. Continued -8- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP KELP's Results of Operations - Continued The following table reflects the analysis of KELP's cash flow for the three and nine months ended September 30, 1994 and 1993 (rounded to 1,000) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1994 1993 1994 1993 Cash Flow from Properties before mortgage debt service and capital improvement expenditures and reserves $ 561,000 $ 579,000 $ 1,736,000 $1,990,000 Mortgage debt service exclusive of amounts due to Partnership (360,000) (356,000) (1,075,000) (1,229,000) Capital improvement expenditures (31,000) (88,000) (52,000) (164,000) Cash flow from properties before mortgage debt service to the Partnership 170,000 135,000 609,000 597,000 Mortgage debt service to the Partnership (170,000) (135,000) (609,000) (597,000) KELP general and administrative expense (12,000) (15,000) (27,000) (44,000) Cash Deficit (1) $ (12,000) $ (15,000) $ (27,000) $ (44,000) (1) Cash deficit equals net loss before the gain or loss on sales plus depreciation and amortization, and unpaid Participating Note interest less mortgage principal payments, capital improvement expenditures and capital improvement reserves. -9- KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None -10- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Krupp Institutional Mortgage Fund Limited Partnership (Registrant) BY: /s/Marianne Pritchard Marianne Pritchard Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner. DATE: November 4, 1994 -11-