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 THEx 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 0-15815 Krupp Insured Plus Limited Partnership Massachusetts 04-2915281 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (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 INSURED PLUS LIMITED PARTNERSHIP BALANCE SHEETS ASSETS September 30, December 31, 1996 1995 Participating Insured Mortgages ("PIMs") $ 58,900,234 $ 59,289,135 (Note 2) Mortgage-Backed Securities and insured mortgage ("MBS") (Note 3) 27,054,259 29,026,838 Total mortgage investments 85,954,493 88,315,973 Cash and cash equivalents 1,870,690 2,394,592 Interest receivable and other assets 842,582 871,942 Prepaid acquisition fees and expenses, net of accumulated amortization of $4,997,850 and $4,423,897, respectively 1,122,658 1,696,611 Prepaid participation servicing fees, net of accumulated amortization of $2,040,007 and $1,895,084, respectively 359,992 504,915 Total assets $ 90,150,415 $ 93,784,033 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 12,985 $ 14,454 Partners' equity (deficit): Limited Partners 89,711,884 92,779,548 (7,500,099 Limited Partner interests outstanding) General Partners (195,276) (172,710) Unrealized gain on MBS 620,822 1,162,741 Total Partners' equity 90,137,430 93,769,579 Total liabilities and Partners' equity $ 90,150,415 $ 93,784,033 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Revenues: Interest income - PIMs $1,103,611 $1,118,398 $3,318,327 $3,362,494 Interest income - MBS 574,453 612,974 1,748,249 1,868,392 Other interest income 25,282 37,109 83,230 119,330 Total revenues 1,703,346 1,768,481 5,149,806 5,350,216 Expenses: Asset management fee to an affiliate 161,989 167,148 485,858 499,089 Expense reimbursements to affiliates 27,753 29,556 78,498 88,665 Amortization of prepaid expenses and fees 239,625 239,625 718,876 718,876 General and administrative 22,827 28,465 70,260 80,498 Total expenses 452,194 464,794 1,353,492 1,387,128 Net income $1,251,152 $1,303,687 $3,796,314 $3,963,088 Allocation of net income (Note 4): Limited Partners $1,213,617 $1,264,576 $3,682,425 $3,844,195 Average net income per Limited Partner interest (7,500,099 Limited Partner interests outstanding) $ .16 $ .17 .49 $ .51 General Partners $ 37,535 $ 39,111 $ 113,889 $ 118,893 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1996 1995 Operating activities: Net income $ 3,796,314 $ 3,963,088 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid expenses and fees 718,876 718,876 Changes in assets and liabilities: Decrease in interest receivable and other assets 29,360 110,107 Decrease in liabilities (1,469) (2,711) Net cash provided by operating activities 4,543,081 4,789,360 Investing activities: Principal collections on PIMs 388,901 389,135 Principal collections on MBS 1,430,660 1,272,685 Net cash provided by investing activities 1,819,561 1,661,820 Financing activity: Quarterly distributions (6,886,544) (6,890,947) Net decrease in cash and cash equivalents (523,902) (439,767) Cash and cash equivalents, beginning of period 2,394,592 2,931,523 Cash and cash equivalents, end of period $ 1,870,690 $ 2,491,756 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS 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. However, in the opinion of the general partners, The Krupp Corporation and The Krupp Company Limited Partnership-IV (collectively the "General Partners"), of Krupp Insured Plus Limited Partnership (the "Partnership") the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Financial Statements included in the Partnership's 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 (consisting of only normal recurring accruals) 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 its cash flows for the nine months ended September 30, 1996 and 1995. 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. PIMs At September 30, 1996, the Partnership's PIMs have a fair value of approximately $58,119,000 and gross unrealized gains and losses of approximately $304,000 and $1,085,000, respectively. The PIMs have maturities ranging from 2006 to 2033. 3. MBS At September 30, 1996, the Partnership's MBS portfolio has an amortized cost of $26,433,437 and gross unrealized gains of $620,822 with maturities from 2004 to 2033. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the nine months ended September 30, 1996 is as follows: Limited General Unrealized Total Partners' Partners Partners Gain Equity Balance at December 31, 1995 $ 92,779,548 $(172,710) $1,162,741 $ 93,769,579 Net income 3,682,425 113,889 - 3,796,314 Quarterly distributions (6,750,089) (136,455) - (6,886,554) Decrease in unrealized gain on MBS - - (541,919) (541,919) Balance at September 30, 1996 $ 89,711,884 $(195,276) $ 620,822 $ 90,137,430 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management s expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources The most significant demands on the Partnership's liquidity are regular quarterly distributions paid to investors of approximately $2.3 million. Funds used for investor distributions come from (i)interest received on the PIMs, MBS, cash and cash equivalents, (ii) the principal collections received on the PIMs and MBS and (iii) cash reserves. The Partnership funds a portion of the distribution from principal collections causing the capital resources of the Partnership to continually decrease. As a result of this decrease, the total cash inflows to the Partnership will also decrease which will result in periodic downward adjustments to the quarterly distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment to the distribution rate is necessary based on projected future cash flows. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions of cash available for distribution. To the extent quarterly distributions differ from cash available for distribution, the General Partners may adjust the distribution rate or distribute funds through a special distribution. The underlying borrower of the Mandalay Apartments PIM should complete a refinancing of the property in the fourth quarter and prepay the insured mortgage having an outstanding principal balance of approximately $16.5 million and a portion of the accumulated participation income. The Partnership will distribute the proceeds to investors through a special distribution of $2.20 per Unit and adjust the quarterly distribution rate to $.19 per Unit per quarter beginning with the February 1997 distribution. The new distribution rate reflects the anticipated cash inflows from the Partnership s remaining invested assets. In the event of a sale or refinancing of the remaining PIMs, the Partnership will distribute the proceeds to investors as a special distribution and adjust the distribution rate as necessary to reflect the anticipated cash inflows from the remaining mortgage investments. For the first five years of the PIMs the borrowers are prohibited from prepaying. For the second five years, the borrower can prepay the loan incurring a prepayment penalty. The Partnership has the option to call certain PIMs by accelerating their maturity if the loans are not prepaid by the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Such factors as the condition of the asset, local market conditions, interest rates and available financing will have an impact on this decision. Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by the Federal National Mortgage Association ( FNMA ), the Government National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the United States Department of Housing and Urban Development ("HUD") and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. FNMA is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represents interest in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government. Distributable Cash Flow and Net Cash Proceeds From Capital Transactions Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions, as defined by Section 17 of the Partnership Agreement, and the source of cash distributions for the nine months ended September 30, 1996 and the period from inception through September 30, 1996. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. (Amounts in thousands, except per Unit amounts) Nine Months Ended Inception through September 30, 1996 September 30,1996 Distributable Cash Flow: Income for tax purposes $ 4,413 $ 71,509 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid expenses and organization costs 102 4,863 Amortization of MBS premiums - 284 Acquisition expenses paid from offering proceeds charged to operations - 1,098 Gain on sale of MBS - (114) Total Distributable Cash Flow ("DCF") $ 4,515 $ 77,640 Limited Partners Share of DCF $ 4,380 $ 75,311 Limited Partners Share of DCF per Limited Partner interest ( Unit ) $ .58 $ 10.04 General Partners Share of DCF $ 135 $ 2,329 Net Proceeds from Capital Transactions: Insurance claim proceeds and principal collections on PIMs $ 389 $ 46,821 Principal collections on MBS 1,431 40,218 Insurance claim proceeds and principal collections on PIMs and MBS reinvested in PIMs and MBS - (40,775) Gain on sale of MBS - 114 Total Net Proceeds from Capital Transactions $ 1,820 $ 46,378 Cash available for distribution (DCF plus Net Proceeds from Capital Transactions) $ 6,335 $124,018 Distributions: (includes special distributions) Limited Partners $6,751 (a) $121,588 (a) Limited Partners Average per Unit $ .90 (a) $ 16.21 (a)(b) General Partners 135 (a) 2,329 (a) Total Distributions $6,886 $123,917 (a) Includes an estimate of the November 1996 distribution. (b) Limited Partners average per Unit return of capital as of November 1996 is $6.17 [$16.21 - $10.04]. Return of capital represents that portion of distributions which are not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs. Operations The following discussion relates to the operations of the Partnership during the three and nine months ended September 30, 1996 and 1995: (Amounts in thousands) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Interest income on PIMs $1,103 $1,118 $3,318 $3,362 Interest income on MBS 574 613 1,748 1,868 Other interest income 25 37 83 119 Partnership expenses (211) (225) (634) (667) Distributable Cash Flow 1,491 1,543 4,515 4,682 Amortization of prepaid fees and expenses (240) (239) (719) (719) Net income $1,251 $1,304 $3,796 $3,963 Net income decreased during the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995 due primarily to lower interest income on MBS. Interest income on MBS will continue to decline as principal collections reduce the outstanding balance of the MBS portfolio. The Partnership funds a portion of distributions with MBS and PIM principal collections which reduces the invested assets generating income for the Partnership. As the invested assets decline so will interest income on MBS, base interest income on PIMs and other interest income. KRUPP INSURED PLUS 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 Insured Plus Limited Partnership (Registrant) BY: /s/Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner of the Registrant. DATE: October 25, 1996