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, 1996 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 This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP BALANCE SHEETS ASSETS September 30, December 31, 1996 1995 Mortgage notes receivable, net of loan loss reserve of $16,524,000 (Notes 2 and 3) $ 6,981,336 $11,795,943 Cash and cash equivalents 1,236,306 1,260,798 Accrued interest receivable - mortgage notes, net of reserve for uncollectible interest of $11,616,195 and $9,755,416, respectively (Note 3) 50,729 112,304 Other assets 2,506 3,735 Total assets $ 8,270,877 $13,172,780 LIABILITIES AND PARTNERS' EQUITY Other liabilities $ 67,313 $ 12,952 Partners' equity (deficit) (Note 4): Limited Partners (30,059 Units outstanding) 8,421,132 13,327,834 General Partners (217,568) (168,006) Total Partners' equity 8,203,564 13,159,828 Total liabilities and Partners' equity $ 8,270,877 $13,172,780 The accompanying notes are an integral part of the financial statements. KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Interest income: Mortgage notes receivable (Notes 2 and 3) $73,737 $124,791 $359,284 $663,250 Cash equivalents 16,793 19,455 62,650 49,908 Total interest income 90,530 144,246 421,934 713,158 Expenses: Expense reimbursements to affiliates (Note 5) 12,951 12,816 36,644 38,448 General and administrative 7,384 12,646 44,794 35,941 Total expenses 20,335 25,462 81,438 74,389 Net income $70,195 $118,784 $340,496 $638,769 Allocation of net income (Note 4): Limited Partners $69,493 $117,596 $337,091 $632,381 Per Unit of Limited Partner Interest (30,059 Units outstanding) $ 2.31 $ 3.91 $ 11.21 $ 21.04 General Partners $ 702 $ 1,188 $ 3,405 $ 6,388 The accompanying notes are an integral part of the financial statements. KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1996 1995 Operating activities: Net income $ 340,496 $ 638,769 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accrued interest receivable-mortgage notes 61,575 130,034 Decrease in other assets 1,229 10,409 Increase (decrease) in other liabilities 54,361 (2,846) Net cash provided by operating activities 457,661 776,366 Investing activity: Decrease in mortgage notes receivable 4,814,607 19,596 Financing activity: Distributions (5,296,760) (455,439) Net increase (decrease) in cash and cash equivalents (24,492) 340,523 Cash and cash equivalents, beginning of period 1,260,798 1,026,664 Cash and cash equivalents, end of period $ 1,236,306 $1,367,187 The accompanying notes are an integral part of the financial statements. 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, 1995 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, 1996, its results of operations for the three and nine months ended September 30, 1996 and 1995, and cash flows for the nine months ended September 30, 1996 and 1995. Certain prior year balances have been reclassified to conform with current year financial statement presentation. The results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. (2) Krupp Equity Limited Partnership ("KELP") Condensed financial statements of KELP are as follows: KRUPP EQUITY LIMITED PARTNERSHIP CONDENSED BALANCE SHEETS ASSETS September 30, December 31, 1996 1995 Property at cost $ 12,702,534 $ 30,960,353 Property valuation provision (5,000,000) (5,986,000) Accumulated depreciation (3,737,050) (10,206,689) 3,965,484 14,767,664 Other assets 323,805 1,086,232 Total assets $ 4,289,289 $ 15,853,896 LIABILITIES AND PARTNERS' DEFICIT Mortgage notes payable to the Partnership $ 28,298,295 $ 28,319,943 Mortgage notes payable (A) - 7,599,279 Notes payable to an affiliate 300,000 300,000 Accrued interest payable to affiliates 7,199,212 10,171,783 Due to affiliates 667,463 767,737 Other liabilities 414,732 633,691 Total liabilities 36,879,702 47,792,433 Partners' deficit (32,590,413) (31,938,537) Total liabilities and Partners' deficit $ 4,289,289 $ 15,853,896 KRUPP EQUITY LIMITED PARTNERSHIP CONDENSED STATEMENTS OF OPERATIONS For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Revenue $ 257,067 $ 870,535 $ 1,459,430 $ 2,593,352 Property operating expenses (70,704) (353,794) (637,314) (1,028,390) Income before depreciation, amortization and interest 186,363 516,741 822,116 1,564,962 Depreciation and amortization (A) (58,966) (82,301) (724,149) (240,497) Interest expense (754,808) (930,176) (2,411,839) (2,769,644) Loss before gain on sale of properties (627,411) (495,736) (2,313,872) (1,445,179) Gain on sale of properties (A) - - 1,661,996 - Net loss $(627,411) $(496,736) $ (651,876) $(1,445,179) (A) On March 5, 1996, KELP sold Village Green Apartments to an unaffiliated third party for $5,200,000. The buyer assumed the first mortgage note payable on the property of $4,633,989. On April 29, 1996, KELP remitted available sale proceeds of $585,959 to the Partnership. On May 16, 1996, KELP sold North Salado Village Shopping Center to an unaffiliated third party for $7,350,000. After satisfying the first mortgage note payable of $2,920,405 and closing costs, KELP remitted available sales proceeds of $4,207,000 to the Partnership on June 6, 1996. (3) Provision for Credit Losses and Accrued Interest Reserves The General Partners of the Partnership have recorded a cumulative provision for credit losses of $16,524,000 on its mortgage notes receivable. As of September 30, 1996, total proceeds of $4,792,959, resulting from the sales of Village Green Apartments and North Salado Village, have been applied against the Partnership's outstanding mortgage note receivable balance. Additionally, the Partnership has recorded cumulative provisions for uncollectible interest of $11,616,195 and $9,775,416 as of September 30, 1996 and December 31, 1995, respectively. These cumulative provisions are booked against the carrying value of the assets in order to reflect management's current estimates of the underlying property values which, given the inherent uncertainty of real estate valuation in the current market, could differ from the ultimate value obtained upon sale of such properties. (4) Summary of Change in Partners' Equity A summary of changes in Partners' equity (deficit) for the nine months ended September 30, 1996 is as follows: Total Limited General Partners' Partners Partners Equity Balance at December 31, 1995 $13,327,834 $(168,006) $13,159,828 Net income 337,091 3,405 340,496 Distributions (5,243,793) (52,967) (5,296,760) Balance at September 30, 1996 $ 8,421,132 $(217,568) $ 8,203,564 (5) Related Party Transactions The Partnership reimburses affiliates of the General Partners for certain expenses incurred in connection with the activities of the Partnership, including: communications, bookkeeping and clerical work necessary in maintaining relations with Limited Partners, and accounting, tax and computer services necessary for the maintenance of the books and records of the Partnership. KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources Currently, the Partnership has sufficient liquidity to meet its operating needs. The most significant capital need is distributions to investors. However, distributions are currently dependent on cash flow received from KELP's interest payments on the Participating Notes based upon the cash flow of the underlying properties. Due to fluctuations in the cash flow payments received from KELP and its effect on the Partnership's liquidity, the Partnership may need to periodically adjust its distribution rate. Therefore, sustaining the current distribution rate is mainly dependent upon the future cash flow payments received from KELP. KELP's properties have not generated cash flow sufficient to meet the terms of their existing obligations. The retail centers have historically suffered from an economic downturn in retail sales beginning in the late 1980's. Recently, the properties have maintained a consistent level of operating cash flow. The partners of KELP have made cumulative capital contributions of approximately $4,673,000 to cover prior operating deficits and have arranged for certain short-term borrowings. Additionally, the affiliated management agent has not received payment of management fees since 1991. The General Partners of the Partnership have not commenced foreclosure proceedings because they have determined that there are advantages to allowing KELP to continue to own the properties. On March 5, 1996, KELP sold Village Green Apartments to an unaffiliated third party for $5,200,000. The buyer assumed the principal outstanding on the first mortgage note payable on the property of $4,633,989. On April 29, 1996, KELP remitted to the Partnership the available sale proceeds, net of closing costs, of $585,959. On May 16, 1996, KELP sold North Salado Village Shopping Center to an unaffiliated third party for $7,350,000. The outstanding first mortgage note payable on the property of $2,920,405 was paid at the closing. On June 6, 1996, KELP remitted to the Partnership sales proceeds, net of closing costs, of $4,207,000. The Partnership made an additional distribution of $4,841,321, utilizing the proceeds received from KELP from the sales of Village Green Apartments and North Salado Village Shopping Center. Operations The decrease in interest income earned for the three and nine months ended September 30, 1996, as compared to the three and nine months ended September 30, 1995, is a result of lower cash flow payments from the underlying KELP mortgages. This decrease is partially offset by an increase in interest income from higher average cash and cash equivalents available for investment. General and administrative expense decreased for the three months ended September 30, 1996, as compared to the same period in 1995, as a result of a decrease in costs related to the preparation and mailing of reports to investors. For the nine months ended September 30, 1996, as compared to the nine months ended September 30, 1995, general and administrative expense increased due to an increase in audit expenditures, partially offset by a decrease in investor related costs, as discussed above. Distributable Cash from Operations Distributable Cash from Operations, of approximately $70,000 and $119,000 for the three months ended September 30, 1996 and 1995, respectively and $340,000 and $639,000 for the nine months ended September 30, 1996 and 1995, respectively, as defined by Section 5.01 of the Partnership Agreement, is equivalent to net income of the Partnership. KELP's Results of Operations The following table presents an analysis of KELP's cash deficit for the three and nine months ended September 30, 1996 and 1995: For the Three Months For the Nine Months Ended September 30, Ended September 30, (Rounded to $1,000) (Rounded to $1,000) 1996 1995 1996 1995 Cash flow from properties before mortgage debt service and capital improvement expenditures and reserves $165,000 $ 518,000 $833,000 $1,558,000 Mortgage debt service exclusive of amounts due to the Partnership (30,000) (239,000) (308,000) (716,000) Capital improvement expenditures (84,000) (172,000) (231,000) (242,000) Contribution to capital improvement reserve - (6,000) (4,000) (8,000) Cash flow from properties before mortgage debt service to the Partnership 51,000 101,000 290,000 592,000 Mortgage debt service to the Partnership (51,000) (101,000) (290,000) (592,000) KELP general and administrative expenses (17,000) (3,000) (32,000) (16,000) Cash Deficit $(17,000) $ (3,000) $(32,000) $ (16,000) 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 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Krupp Institutional Mortgage Fund Limited Partnership (Registrant) BY: /s/Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner. DATE: November 14, 1996