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, 1999 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 (IRS employer identification no.) of incorporation or organization) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (Zip Code) (617) 523-0066 (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, 1999 1998 Participating Insured Mortgages ("PIMs") $ 28,827,933 $ 29,074,105 (Note 2) Mortgage-Backed Securities and insured mortgage ("MBS") (Note 3) 22,512,729 23,880,438 Total mortgage investments 51,340,662 52,954,543 Cash and cash equivalents 3,417,731 3,653,130 Interest receivable and other assets 347,821 367,780 Prepaid acquisition fees and expenses, net of accumulated amortization of $640,996 and $590,032 respectively 203,256 254,220 Prepaid participation servicing fees, net of accumulated amortization of $217,942 and $193,113, respectively 113,110 137,939 Total assets $ 55,422,580 $ 57,367,612 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 13,501 $ 20,198 Partners' equity (deficit)(Note 4): Limited Partners (7,500,099 Limited Partner interests outstanding) 55,086,351 56,720,679 General Partners (240,503) (237,028) Accumulated Comprehensive Income 563,231 863,763 Total Partners' equity 55,409,079 57,347,414 Total liabilities and Partners' equity $ 55,422,580 $ 57,367,612 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 Revenues: Interest income - PIMs Basic interest $ 534,946 $ 453,296 $ 1,608,194 $ 1,722,914 Participation interest - - - 250,000 Interest income - MBS 469,560 507,670 1,437,736 1,549,773 Other interest income 46,343 48,284 136,131 211,181 Total revenues 1,050,849 1,009,250 3,182,061 3,733,868 Expenses: Asset management fee to an affiliate 96,135 99,698 287,540 308,444 Expense reimbursements to affiliates 13,512 11,577 28,770 15,836 Amortization of prepaid fees and expenses 25,263 25,265 75,793 75,795 General and administrative 28,251 23,100 67,557 90,492 Total expenses 163,161 159,640 459,660 490,567 Net income 887,688 849,610 2,722,401 3,243,301 Other comprehensive income: Net change in unrealized gain on MBS (102,487) 84,125 (300,532) 233,192 Total comprehensive income $ 785,201 $ 933,735 $ 2,421,869 $ 3,476,493 Allocation of net income (Note 4): Limited Partners $ 861,057 $ 824,122 $ 2,640,729 $ 3,146,002 Average net income per Limited Partner interest (7,500,099 Limited Partner interests outstanding) $ .11 $ .11 $ .35 $ .42 General Partners $ 26,631 $ 25,488 $ 81,672 $ 97,299 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, 1999 1998 Operating activities: Net income $ 2,722,401 $ 3,243,301 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 75,793 75,795 Premium amortization 3,022 - Prepayment premium - (250,000) Changes in assets and liabilities: Decrease in interest receivable and other assets 19,959 169,188 Decrease in liabilities (6,697) (5,906) Net cash provided by operating activities 2,814,478 3,232,378 Investing activities: Principal collections on PIMs including prepayment premium of $250,000 in 1998 246,172 8,888,709 Principal collections on MBS 1,064,155 1,185,696 Net cash provided by investing activities 1,310,327 10,074,405 Financing activities: Quarterly distributions (4,360,204) (4,386,475) Special distributions - (8,400,111) Net cash used for financing activities (4,360,204) (12,786,586) Net (decrease)/increase in cash and cash equivalents (235,399) 520,197 Cash and cash equivalents, beginning of period 3,653,130 3,100,615 Cash and cash equivalents, end of period $ 3,417,731 $ 3,620,812 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, 1998 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners, 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, 1999, its results of operations for the three and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998. The results of operations for the three and nine months ended September 30, 1999 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, 1999, the Partnership's PIMs had a fair market value of $28,773,703 and gross unrealized gains and losses of $38,176 and $92,406, respectively. The PIMs have maturities ranging from 2006 to 2033. At September 30, 1999, the Partnership's participating insured mortgage loan was not delinquent with respect to principal or interest payments. 3. MBS At September 30, 1999, the Partnership's MBS portfolio had an amortized cost of $21,949,498 and gross unrealized gains of $563,231 with maturities from 2006 to 2033. At September 30, 1999, the Partnership's insured mortgage loan was not delinquent with respect to principal or interest payments. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the nine months ended September 30, 1999 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity Balance at December 31, 1998 $ 56,720,679 $ (237,028) $ 863,763 $ 57,347,414 Net income 2,640,729 81,672 - 2,722,401 Quarterly distributions (4,275,057) (85,147) - (4,360,204) Change in unrealized gain on MBS - - (300,532) (300,532) Balance at September 30, 1999 $ 55,086,351 $ (240,503) $ 563,231 $ 55,409,079 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. Impact of the Year 2000 Issue The General Partners have conducted an assessment of the Partnership's core internal and external computer information systems and have taken the necessary steps to further 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, 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 General Partners 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 significant internal systems or software that the Partnership is using at the present time. The General Partners surveyed the Partnership's material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors and received assurances that such service providers and vendors are Year 2000 ready. The Partnership does not anticipate any problems with such providers and vendors that would materially impact its results of operations, liquidity or capital resources. Nevertheless, the General Partners are developing contingency plans for all of their "mission-critical functions" to insure business continuity. The Partnership is also subject to external forces that might generally affect industry and commerce, such as utility and transportation company Year 2000 readiness failures and related service interruptions. However, the General Partners do not anticipate any material impact on the Partnership's results of operations, liquidity or capital resources. To date, the Partnership has incurred $10,370 associated with being Year 2000 ready. The Partnership does not expect to incur any additional Year 2000 readiness costs. 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 and as a result the capital resources of the Partnership will continually decrease. As a result of this decrease, the total cash inflows to the Partnership will also decrease which will result in periodic adjustments to the quarterly distributions paid to investors. 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. Based on current projections, the General Partners believe the Partnership can maintain the current distribution rate through February 2000. However, in the event of PIM prepayments, the Partnership would be required to distribute any proceeds from the prepayments as a special distribution which may cause an adjustment to the distribution rate to reflect the anticipated future cash inflows from the remaining mortgage investments. Royal Palm Place and Vista Montana operate under long-term restructure programs. As an ongoing result of the Partnership's 1995 agreement to modify the payment terms of the Royal Palm Place PIM, the Partnership will receive basic interest-only payments on the Fannie Mae MBS at the rate of 7.375% per annum during 1999. Thereafter, the interest rate will range from 7.5% to 8.775% per annum through the maturity of the first mortgage loan in 2006. The Partnership also received its share ($68,423) of the scheduled $250,000 principal payment in January 1999. The Partnership agreed in 1993 to permanently reduce the interest rate on the Vista Montana first mortgage loan to 7.375% per annum. The mediocre operating performance of the remaining portfolio property, La Costa, has not generated a sufficient increase in its value to provide an incentive for the owners to pursue either a sale or a refinance of the property. La Costa is an older property with physical shortcomings that affect rental income potential and increase the cost of operations. The first mortgage loan underlying the PIM on La Costa Apartments went into default in June 1999. However, the Partnership will continue to receive its full principal and interest payments until the default is resolved because GNMA has guaranteed those payments to the Partnership. The Partnership expects to receive a prepayment of the outstanding principal balance due on the PIM, but will not receive any participation interest. 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 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. The Partnership includes in cash and cash equivalents approximately $3.2 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization. Results of Operations The following discussion relates to the operations of the Partnership during the three and nine months ended September 30, 1999 and 1998. Net income increased by approximately $38,000 for the three months ended September 30, 1999 as compared to the corresponding period in 1998. The increase was due to an over accrual of interest income on PIMs during the third quarter of 1998, net of lower interest income on MBS resulting from the on-going principal collections on the single-family MBS. Net income decreased by approximately $521,000 for the nine months ended September 30, 1999, as compared to the corresponding period in 1998. The decrease was due primarily to lower basic interest on PIMs resulting from the prepayment of the Greentree PIM in March 1998 and the receipt of $250,000 of participation interest in 1998. Additionally, interest income on MBS declined due to ongoing amortization of the portfolio and other interest income decreased due to lower average cash balances in 1999 as compared to 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, interest income to the Partnership will decline. 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 Vice-President of The Krupp Corporation, a General Partner of the Registrant. DATE: October 29, 1999