UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 The total number of pages in this document is 12. 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 June 30, December 31, 1997 1996 Mortgage notes receivable, net of loan loss reserve of $16,524,000 (Notes 3 and 4)$ 6,958,010 $ 6,973,754 Cash and cash equivalents (Note 2) 1,100,166 1,112,524 Accrued interest receivable - mortgage notes, net of reserve for uncollectible interest of $13,391,566 and $12,225,634, respectively (Note 4) 128,736 115,272 Due from affiliates (Note 6) - 16,250 Other assets 4,244 1,672 Total assets $ 8,191,156 $ 8,219,472 LIABILITIES AND PARTNERS' EQUITY Liabilities 17,504 25,274 Partners' equity (deficit) (Note 5): Limited Partners (30,059 Units outstanding)8,391,520 8,411,861 General Partners (217,868) (217,663) Total Partners' equity 8,173,652 8,194,198 Total liabilities and Partners' equity $ 8,191,156 $ 8,219,472 The accompanying notes are an integral part of the financial statements. KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Three Months For the Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Interest income: Mortgage notes receivable (Notes 3 and 4) $151,169 $129,172 $304,920 $285,547 Cash equivalents (Note 2) 15,363 28,738 30,086 45,857 Total revenue 166,532 157,910 335,006 331,404 Expenses: Expense reimbursements (Note 6) 9,156 10,740 16,583 23,693 General and administrative 13,745 19,459 35,343 37,410 Total expenses 22,901 30,199 51,926 61,103 Net income $143,631 $127,711 $283,080 $270,301 Allocation of net income (Note 5): Limited Partners (30,059 Units outstanding) $142,194 $126,434 $280,249 $267,598 Per Unit of Limited Partner$ 4.73 $ 4.20 $ 9.32 $ 8.90 General Partners $ 1,437 $ 1,277 $ 2,831 $ 2,703 The accompanying notes are an integral part of the financial statements. KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1997 1996 Operating activities: Net income $ 283,080 $ 270,301 Adjustments to reconcile net income to net cash provided by operating activities: Changes in assets and liabilities: Decrease (increase) in accrued interest receivable-mortgage notes (13,464) 6,321 Decrease in due from affiliates 16,250 1,081 Increase in other assets (2,572) (5,806) Increase (decrease) in liabilities (7,770) 3,048 Net cash provided by operating activities 275,524 274,945 Investing activities: Principal collections from mortgage notes receivable 15,744 - Decrease in mortgage notes receivable - 4,807,210 Increase in other investments - (471,218) Net cash provided by investing activities 15,744 4,335,992 Financing activity: Distributions (303,626) (5,096,534) Net decrease in cash and cash equivalents (12,358) (485,597) Cash and cash equivalents, beginning of period 1,112,524 1,260,798 Cash and cash equivalents, end of period $ 1,100,166 $ 775,201 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, 1996 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 June 30, 1997 and its results of operations for the three and six months ended June 30, 1997 and 1996 and cash flows for the six months ended June 30, 1997 and 1996. Certain prior year balances have been reclassified to conform with current year financial statement presentation. The results of operations for the three and six months ended June 30, 1997 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)Cash and Cash Equivalents Cash and cash equivalents consisted of the following: June 30, December 31, 1997 1996 Cash and money market accounts $ 306,843 $ 316,317 Commercial paper 793,323 796,207 $1,100,166 $ 1,112,524 At June 30, 1997, commercial paper represents corporate issues complying with Section 3.04 of the Partnership Agreement maturing in the third quarter of 1997. At June 30, 1997, the carrying value of the Partnership's investment in commercial paper approximates fair value. (3)Krupp Equity Limited Partnership ("KELP") The Partnership made loans to KELP, an affiliate of the Partnership, as provided under the Master Loan Agreement and Collateral Pledge Agreement. The purpose of KELP is to acquire, manage, operate and sell real estate and personal property; and to borrow funds from the Partnership and other sources to finance the acquisition, management and operation of real estate and personal property related thereto. Condensed financial statements of KELP are as follows: Continued KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued (3) Krupp Equity Limited Partnership ("KELP") - Continued KRUPP EQUITY LIMITED PARTNERSHIP CONDENSED BALANCE SHEETS ASSETS June 30, December 31, 1997 1996 Real estate assets: Real estate, at cost $ 12,730,151 $ 12,716,122 Property valuation provision (5,000,000) (5,000,000) Accumulated depreciation (3,911,653) (3,795,870) Total real estate assets 3,818,498 3,920,252 Other assets 339,187 305,538 Total assets $ 4,157,685 $ 4,225,790 LIABILITIES AND PARTNERS' DEFICIT Mortgage notes payable to the Partnership$ 28,274,969 $28,290,713 Notes payable to an affiliate 300,000 300,000 Accrued interest payable to an affiliate (A) 9,073,836 7,880,286 Due to affiliates 703,414 666,702 Other liabilities 424,199 386,780 Total liabilities 38,776,418 37,524,481 Partners' deficit (34,618,733)(33,298,691) Total liabilities and Partners' deficit $ 4,157,685 $ 4,225,790 KRUPP EQUITY LIMITED PARTNERSHIP CONDENSED STATEMENTS OF OPERATIONS For the Three Months For the Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Revenue (A)(B) $ 638,551 $ 435,270 $ 905,516 $1,202,363 Property operating expenses (126,619) (183,791) (254,033) (566,610) Depreciation and amortization (A)(B) (235,882) (189,862) (294,713) (665,183) Interest (B) (1,049,007) (781,299)(1,787,543)(1,657,031) Loss before gain on sale of properties and gain on extinguishment of debtv (772,957) (719,682) (1,430,773)(1,686,461) Gain on sale of properties (A) - 186,086 - 1,661,996 Gain on extinguishment of debt (B) 108,711 - 108,711 - Net loss $ (664,246)$(533,596) $(1,322,062)$(24,465) Continued KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued (3)Krupp Equity Limited Partnership ("KELP") - Continued (A)On March 5, 1996, KELP sold Village Green Apartments to an unaffiliated third party for $5,200,000. On May 16, 1996, KELP sold North Salado to an unaffiliated third party for $7,350,000. KELP remitted available sale proceeds of $4,792,959 to the Partnership. For KELP's financial reporting purposes, sales proceeds paid to KIMF of $4,792,959 were applied against accrued interest in 1996. (B) On May 13, 1997, KELP acquired all of the beneficial interests in four Delaware business trusts and a 99% member interest in a limited liability company (collectively referred to as the "Entities") for an aggregate purchase price of $32,025,603. KELP acquired the Entities for cash of $3,309,761, subject to their outstanding mortgage balances as of May 13, 1997, totaling $28,715,842. KELP obtained the cash used in the exchange through the proceeds of a loan made by KCLP III ("KCLP III Note"), its general partner and limited partner. Each of the Entities acquired owns real property, which is net leased to a national retail franchise. On June 23, 1997, KELP admitted KGP-II Inc. as a limited partner. Subsequently, on June 30, 1997, KELP distributed its interests in the Entities to KCLP III in full satisfaction of the KCLP III Note and in exchange for its entire partnership interest in KELP. The promissory notes due KIMF from KCLP III, which total $2,767,388 and are pledged as collateral on the participating promissory notes ("Participating Notes"), remain as an obligation of KCLP III. The above transactions had no effect on KELP's net loss and there was no positive or negative cash flow which resulted from the operations of the Entities. Accordingly, the transaction had no impact on KELP's ability to make the required quarterly cash flow payment to KIMF, the holder of its Participating Notes, or its ability to meet other obligations with respect to the Participating Notes. (4)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 June 30, 1997 and December 31, 1996. Additionally, the Partnership has recorded cumulative provisions for uncollectible interest of $13,391,566 and $12,225,634 as of June 30, 1997 and December 31, 1996, respectively. These cumulative provisions are recorded 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. Continued KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued (5) Summary of Changes in Partners' Equity A summary of changes in Partners' equity (deficit) for the six months ended June 30, 1997 is as follows: Total Limited General Partners' Partners Partners Equity Balance at December 31, 1996 $8,411,861 $(217,663) $8,194,198 Net income 280,249 2,831 283,080 Distributions (300,590) (3,036) (303,626) Balance at June 30, 1997 $ 8,391,520 $(217,868)$8,173,652 (6) 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. Due from affiliates consisted of expense reimbursements of $16,250 at December 31, 1996. 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. Distributions are dependent on cash flow received from KELP's interest payments on the Participating Notes, which are 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. Recently, the remaining 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, due to the depressed state of the real estate market, KELP would be unable to dispose of its properties at other than unattractive prices. Thus, the General Partners believed that it was in the Partnership's best interest to continue to permit KELP to hold the properties and attempt to increase cash flows and selectively sell the properties, as market values recover. Operations Total revenue slightly increased for three and six months ended June 30, 1997, as compared to the three and six months ended June 30, 1996, as a result of the increase in interest income on mortgage notes due to higher cash flow interest payments received from KELP's properties. This increase is partially offset by a decrease in interest income attributable to lower average cash and cash equivalents available for investment. Total expenses decreased for the three and six months ended June 30, 1997, as compared to the same periods in 1996, due to a decrease in expense reimbursements. The decrease in expense reimbursements is due to decreased costs incurred in connection with the preparation and mailing of reports and other investor communications. Distributable Cash from Operations Distributable Cash from Operations, of approximately $144,000 and $128,000 for the three months ended June 30, 1997 and 1996, respectively and $283,000 and $270,000 for the six months ended June 30, 1997 and 1996, respectively, as defined by Section 5.01 of the Partnership Agreement, is equivalent to net income of the Partnership. Continued KRUPP INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP KELP Operations Net loss, after giving effect to the sales of Village Green Apartments and North Salado Shopping Center and the acquisition and distribution of the Entities (as described in Note 3), remained stable for the three and six months ended June 30, 1997, when compared to the same periods in 1996, as total revenue and total expenses remained relatively constant. 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/Wayne H. Zarozny Wayne H. Zarozny Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner. DATE: August 14, 1997