UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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, 1998 1997 Participating Insured Mortgages ("PIMs")(Note 2) $ 29,131,126 $ 37,769,835 Mortgage-Backed Securities and insured mortgage ("MBS") (Note 3) 24,945,088 25,897,592 Total mortgage investments 54,076,214 63,667,427 Cash and cash equivalents 3,620,812 3,100,615 Interest receivable and other assets 364,990 534,178 Prepaid acquisition fees and expenses, net of accumulated amortization of $573,045 and $522,080, respectively 271,207 322,172 Prepaid participation servicing fees, net of accumulated amortization of $184,838 and $160,008, respectively 146,214 171,044 Total assets $ 58,479,437 $ 67,795,436 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 15,211 $ 21,117 Partners' equity (deficit)(Note 4) Limited Partners 57,245,815 66,774,981 (7,500,099 Limited Partner interests outstanding) General Partners (238,612) (224,493) Unrealized gain on MBS 1,457,023 1,223,831 Total Partners' equity 58,464,226 67,774,319 Total liabilities and Partners' equity $ 58,479,437 $ 67,795,436 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, 1998 1997 1998 1997 Revenues: Interest income - PIMs Base interest $ 453,296 $ 799,175 $1,722,914 $2,403,843 Participation interest - - 250,000 - Interest income - MBS 507,670 543,961 1,549,773 1,644,568 Other interest income 48,284 31,611 211,181 86,537 Total revenues 1,009,250 1,374,747 3,733,868 4,134,948 Expenses: Asset management fee to an affiliate 99,698 127,733 308,444 381,194 Expense reimbursements to affiliates 11,577 20,130 15,836 56,597 Amortization of prepaid fees and expenses 25,265 154,600 75,795 497,384 General and administrative 23,100 26,861 90,492 112,741 Total expenses 159,640 329,324 490,567 1,047,916 Net income 849,610 1,045,423 3,243,301 3,087,032 Net change in unrealized gain on MBS 84,125 58,586 233,192 90,161 Total comprehensive income $ 933,735 $1,104,009 $3,476,493 $3,177,193 Allocation of net income (Note 4): Limited Partners $ 824,122 $1,014,061 $3,146,002 $2,994,421 Average net income per Limited Partner interest (7,500,099 Limited Partner interests outstanding) $ .11 $ .14 $ .42 $ .40 General Partners $ 25,488 $ 31,362 $ 97,299 $ 92,611 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, 1998 1997 Operating activities: Net income $ 3,243,301 $3,087,032 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid expenses and fees 75,795 497,384 Prepayment premium (250,000) - Changes in assets and liabilities: Decrease in interest receivable and other assets 169,188 50,471 Decrease in liabilities (5,906) (3,178) Net cash provided by operating activities 3,232,378 3,631,709 Investing activities: Principal collections on PIMs including prepayment premium of $250,000 in 1998 8,888,709 329,834 Principal collections on MBS 1,185,696 1,072,919 Net cash provided by investing activities 10,074,405 1,402,753 Financing activities: Quarterly distributions (4,386,475) (4,411,871) Special distributions (8,400,111) - Net cash used for financing activities (12,786,586) (4,411,871) Net increase in cash and cash equivalents 520,197 622,591 Cash and cash equivalents, beginning of period 3,100,615 1,757,197 Cash and cash equivalents, end of period $3,620,812 $2,379,788 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, 1997 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, 1998, its results of operations for the three and nine months ended September 30, 1998 and 1997 and its cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 30, 1998 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, 1998, the Partnership's PIMs have a fair value of $29,137,674 and gross unrealized gains and losses of $27,926 and $21,378, respectively. The PIMs have maturities ranging from 2006 to 2033. At September 30, 1998 there are no insured mortgage loans within the Partnership's portfolio that are delinquent with respect to principal or interest payments. The borrower on the Greentree PIM defaulted on the first mortgage obligation. During the default the Partnership had continued to receive its full principal and interest payments due on the PIM because GNMA had guaranteed those payments to the Partnership. In March 1998, the GNMA mortgagee exercised their right to prepay the GNMA MBS because of the continuing default of the underlying first mortgage loan, and the Partnership received proceeds from the prepayment of the GNMA MBS in the amount of $8,362,336. On April 16, 1998, the Partnership made a special distribution to the investors from the capital proceeds of $1.12 per Limited Partner interest. Subsequent to the payoff of the GNMA MBS, the General Partners negotiated a settlement with the borrower to release the Subordinated Promissory Note, and $250,000 was received in July 1998. 3. MBS At September 30, 1998, the Partnership's MBS portfolio has an amortized cost of $23,488,065 and gross unrealized gains of $1,457,023 with maturities from 2004 to 2033. In June 1997, Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' (FASB 130), was issued establishing standards for reporting and displaying comprehensive income and its components effective January 1, 1998. FASB 130 requires comprehensive income and its components, as recognized under accounting standards, to be displayed in a financial statement with the same prominence as other financial statements, if material. Accordingly, unrealized gains (losses) on the Partnership's available-for sale securities have been included in other comprehensive income. Continued KRUPP INSURED PLUS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the nine months ended September 30, 1998 is as follows: Limited General Unrealized Total Partners' Partners Partners Gain Equity Balance at December 31, 1997 $ 66,774,981 $(224,493) $1,223,831 $ 67,774,319 Net income 3,146,002 97,299 - 3,243,301 Quarterly distributions (4,275,057) (111,418) - (4,386,475) Special distributions (8,400,111) - - (8,400,111) Increase in unrealized gain on MBS - - 233,192 233,192 Balance at September 30, 1998 $ 57,245,815 $(238,612) $1,457,023 $ 58,464,226 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. The General Partners of the Partnership have conducted an assessment of the Partnership's core internal and external computer information systems and have taken the further necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. In this regard, the General Partners of the Partnership, along with certain affiliates, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The General Partners completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the General Partners have generated operating efficiencies and believe their financial accounting operating systems are Year 2000 ready. The Partnership incurred hardware costs as well as consulting and other expenses related to the infrastructure and facilities enhancements necessary to complete the upgrade and prepare for the Year 2000. There are no other systems or software that the Partnership is using at the present time. The General Partners of the Partnership are in the process of evaluating the potential adverse impact that could result from the failure of material third- party service providers (including but not limited to its banks and telecommunications providers) and significant vendors to be Year 2000 ready. No estimate can be made at this time as to the impact of the readiness of such third parties. Liquidity and Capital Resources The most significant demands on the Partnership's liquidity are regular quarterly distributions paid to investors of approximately $1.5 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. As a result of the Greentree PIM prepayment the Partnership made a special distribution of $1.12 per unit from the payoff proceeds. Consequently, the Partnership's capital resources and its future cash flows will be lower. However, at this time the General Partners has determined that the Partnership can maintain its current dividend rate of $.76 per unit per year. The General Partners periodically review the distribution rate to determine whether an adjustment 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 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 Fannie Mae, 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. Fannie Mae 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 represent interests 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. Operations The following discussion relates to the operations of the Partnership during the three and nine months ended September 30, 1998 and 1997. Net income decreased for the three month period ended September 30, 1998 as compared to the same period in 1997. This decrease was due to lower interest income on PIMs and MBS, which was offset, by higher interest income on cash and cash equivalents and lower expenses. PIM interest income decreased as did asset management fees paid to an affiliate due primarily to the prepayments of the Pine Hills PIM in November of 1997 and the Greentree PIM in March 1998. The increase in interest income on cash and cash equivalents was due to the Partnership having higher short-term investment balances during the three months ended September 30, 1998 as compared to the same period in 1997. Amortization expense decreased as all the prepaid expenses and fees associated with all the remaining PIMs, except Vista Montana were fully amortized. Net income increased for the nine month period ended September 30, 1998 as compared to the same period in 1997. This increase was due to higher participation interest and interest income on cash and cash equivalents and lower expenses, which was offset by lower interest income on PIMs and MBS. The increase in participation income is related to the Greentree PIM prepayment. The increase in interest income on cash and cash equivalents was due to the Partnership having higher short-term investment balances during the nine months ended September 30, 1998 as compared to the same period in 1997. Amortization expense decreased as all the prepaid expenses and fees associated with all the remaining PIMs, except Vista Montana have been fully amortized. Expense reimbursements to affiliates decreased during the nine months ended September 30, 1998 due to the Partnership having received a rebate for expense reimbursementsrelated to 1997. PIM interest income decreased as did asset management fees paid to an affiliate due primarily to the prepayments of the Pine Hills PIM in November of 1997 and the Greentree PIM in March 1998. Interest income on PIMs and MBS will continue to decline as principal collections reduce the outstanding balance of the portfolios. 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 Mortgage Officer of The Krupp Corporation, a General Partner of the Registrant. DATE: October 28, 1998