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 March 31, 2000 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 0-17690 Krupp Insured Mortgage Limited Partnership Massachusetts 04-3021395 (State or other jurisdiction of (IRS employer identification no.) 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 MORTGAGE LIMITED PARTNERSHIP BALANCE SHEETS ASSETS March 31, December 31, 2000 1999 Participating Insured Mortgages ("PIMs") (Note 2) $ 46,719,584 $ 51,390,092 Mortgage-Backed Securities ("MBS")(Note 3) 7,202,126 7,460,112 Total mortgage investments 53,921,710 58,850,204 Cash and cash equivalents (Note 2) 2,433,260 39,434,806 Interest receivable and other assets 363,758 187,363 Prepaid acquisition fees and expenses, net of accumulated amortization of $1,172,472 and $3,151,323, respectively 128,535 184,416 Prepaid participation servicing fees, net of accumulated amortization of $379,810 and $1,033,292, respectively 50,380 69,702 Total assets $ 56,897,643 $ 98,726,491 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 14,221 $ 19,550 Partners' equity (deficit) (Note 4): Limited Partners (14,956,796 Limited Partner interests outstanding) 57,258,733 99,051,048 General Partners (360,862) (347,682) Accumulated comprehensive income (loss) (14,449) 3,575 Total Partners' equity 56,883,422 98,706,941 Total liabilities and partners' equity $ 56,897,643 $ 98,726,491 The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Three Months Ended March 31, 2000 1999 Revenues: Interest income - PIMs: Basic interest $ 925,070 $ 1,783,094 Participation interest (Note 2) 526,958 922,438 Interest income - MBS 146,545 340,452 Other interest income 133,505 155,906 Total revenues 1,732,078 3,201,890 Expenses: Asset management fee to an affiliate 111,534 200,669 Expense reimbursements to affiliates 27,196 4,932 Amortization of prepaid fees and expenses 75,203 430,947 General and administrative expenses 41,007 49,575 Total expenses 254,940 686,123 Net income 1,477,138 2,515,767 Other comprehensive income: Net change in unrealized loss on MBS (18,024) (86,846) Total comprehensive income $ 1,459,114 $ 2,428,921 Allocation of net income (Note 4): Limited Partners $ 1,432,824 $ 2,440,294 Average net income per Limited Partner interest (14,956,796 Limited Partner interests outstanding) $ .10 $ .16 General Partners $ 44,314 $ 75,473 The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2000 1999 Operating activities: Net income $ 1,477,138 $ 2,515,767 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 75,203 430,947 Shared Appreciation Interest and prepayment premium income (320,239) (703,860) Changes in assets and liabilities: Decrease (increase) in interest receivable and other assets (176,395) 75,366 Increase (decrease) in liabilities (5,329) 482,058 Net cash provided by operating activities 1,050,378 2,800,278 Investing activities: Principal collections on PIMs including Shared Appreciation Interest and prepayment premium income of $320,239 in 2000 and $703,860 in 1999 4,990,747 16,322,830 Principal collections on MBS 239,962 941,294 Net cash provided by investing activities 5,230,709 17,264,124 Financing activities: Quarterly distributions (3,198,421) (3,225,921) Special distributions (40,084,212) (9,871,486) Net cash used for financing activities (43,282,633) (13,097,407) Net increase (decrease) in cash and cash equivalents (37,001,546) 6,966,995 Cash and cash equivalents, beginning of period 39,434,806 15,117,466 Cash and cash equivalents, end of period $ 2,433,260 $ 22,084,461 Non cash activities: Decrease in Fair Value of MBS $ (18,024) $ (86,846) The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE 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, Krupp Plus Corporation and Mortgage Services Partners Limited Partnership, (collectively the "General Partners") of Krupp Insured Mortgage 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, 1999 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 March 31, 2000, and its results of operations and cash flows for the three months ended March 31, 2000 and 1999. The results of operations for the three months ended March 31, 2000 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 On March 30, 2000, the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds in the amount of $4,531,910, received from the Brookside Apartments PIM payoff in February of 2000. The underlying first mortgage loan matured on February 1, 2000; however, the Borrower was unable to close on his refinancing of the property in time to payoff the loan on its maturity date. Consequently, Fannie Mae paid off the MBS under its guarantee obligation. Subsequent to the payoff of the MBS portion of the PIM, the Partnership received $130,000 of Shared Appreciation Interest and $176,513 of Shared Income Interest on March 28, 2000. The Partnership will pay out the Shared Appreciation Interest proceeds with the next special distribution (see below). On March 30, 2000, the Partnership received $190,239 of Shared Appreciation Interest and $5,973 of Shared Income Interest as a result of the expected payoff of the Bell Station Apartments PIM during April of 2000. The Partnership anticipates a second quarter special distribution of $.36 per Limited Partner interest representing the Shared Appreciation Interest from Brookside and Bell Station and the principal proceeds from Bell Station PIM in the amount of $4,901,863. On January 11, 2000, the Partnership paid a special distribution of $2.37 per Limited Partner interest from the prepayment proceeds received during December 1999 from the Salishan, Saratoga, and Marina Shores Apartments PIMs, and the Patrician MBS. In addition to the principal proceeds from the Salishan PIM of $14,666,235, the Partnership received $146,662 of prepayment premium income and $311,650 of Shared Income Interest and Minimum Additional Interest. The Partnership received $6,008,565 of principal proceeds from the Marina Shores PIM along with $176,679 of Shared Appreciation Interest and prepayment premium income. The principal proceeds from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did not receive any participation interest on the Saratoga prepayment. At March 31, 2000, the Partnerships PIM portfolio has a fair market value of $46,426,542 and gross unrealized gains and losses of $118,461 and $411,503, respectively. The Partnership?s PIMs have maturities ranging from 2000 to 2031. 3. MBS As of March 31, 2000, the Partnership?s MBS portfolio has an amortized cost of $7,216,575 and gross unrealized gains and losses of $118,291 and $132,740, respectively. The MBS portfolio has maturity dates ranging from 2016 to 2024. Continued KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the three months ended March 31, 2000 is as follows: Accumulated Comprehensive Total Limited General Income Partner's Partners Partners (Loss) Equity Balance at December 31, 1999 $ 99,051,048 $ (347,682) $ 3,575 $ 98,706,941 Net income 1,432,824 44,314 - 1,477,138 Quarterly distributions (3,140,927) (57,494) - (3,198,421) Special distributions (40,084,212) - - (40,084,212) Change in unrealized loss on MBS - - (18,024) (18,024) Balance at March 31, 2000 $ 57,258,733 $ (360,862) $ (14,449) $ 56,883,422 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 the regular quarterly distributions paid to investors of approximately $3.1 million. Funds used for the investor distributions are generated from interest income received on the PIMs, MBS, cash and short-term investments and the principal collections received on the PIMs and MBS. The Partnership funds a portion of the quarterly distribution from principal collections causing the capital resources of the Partnership to continually decrease. As a result of the decrease, the total cash inflows to the Partnership will also decrease, which will result in periodic adjustments to the 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. Based on current projections the General Partners have determined that the Partnership will adjust the current distribution rate of $.21 per Limited Partner interest per quarter to $.06 per Limited Partner interest per quarter commencing with the distribution to be paid in May 2000. The change in the rate is due to the significant number of payoffs and special distributions that have occurred over the last six months plus two additional payoffs and special distributions anticipated during the second quarter from The Bell Station and The Enclave PIMs. On March 30, 2000, the Partnership received $190,239 of Shared Appreciation Interest and $5,973 of Shared Income Interest as a result of the expected payoff of the Bell Station Apartments PIM during April of 2000. The Partnership anticipates a second quarter special distribution of $.36 per Limited Partner interest from the Shared Appreciation Interest from Brookside and Bell Station and the principal proceeds from Bell Station PIM in the amount of $4,901,863. In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investments also may provide additional income through its participation feature in the underlying properties if they operate successfully. The Partnership may receive a share in any operating cash flow that exceeds debt service obligations and capital needs or a share in any appreciation in value when the properties are sold or refinanced. However, this participation is neither guaranteed nor insured, and it is dependent upon whether property operations or its terminal value meet certain criteria. On March 30, 2000, the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds in the amount of $4,531,910, received from the Brookside Apartments PIM payoff in February of 2000. The underlying first mortgage loan matured on February 1, 2000; however, the Borrower was unable to close on his refinancing of the property in time to payoff the loan on its maturity date. Consequently, Fannie Mae paid off the MBS under its guarantee obligation. Subsequent to the payoff of the MBS portion of the PIM, the Partnership received $130,000 of Shared Appreciation Interest and $176,513 of Shared Income Interest on March 28, 2000. The Partnership will pay out the Shared Appreciation Interest proceeds with the Bell Station proceeds during the second quarter. On January 11, 2000, the Partnership paid a special distribution of $2.37 per Limited Partner interest from the prepayment proceeds received during December 1999 from the Salishan, Saratoga, and Marina Shores Apartments PIMs, and the Patrician MBS. In addition to the principal proceeds from the Salishan PIM of $14,666,235, the Partnership received $146,662 of prepayment premium income and $311,650 of Shared Income Interest and Minimum Additional Interest. The Partnership received $6,008,565 of principal proceeds from the Marina Shores PIM along with $176,679 of Shared Appreciation Interest and prepayment premium income. The principal proceeds from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did not receive any participation interest on the Saratoga prepayment. Due to poor operating performance, the General Partners are closely monitoring the Wildflower Apartments PIM property which is located in the Las Vegas market. Wildflower has suffered a dramatic decline in occupancy to the mid-80% range at year-end that is not representative of the rest of the market. Wildflower does not compete successfully with the newer apartment properties, which have extensive amenity packages to attract new residents. The Partnership's only other remaining PIM investments are backed by the underlying first mortgage loans on The Enclave, Creekside and Richmond Park. The loan on The Enclave matures on May 1, 2000; however, like Brookside, its borrower may not have his refinancing in place on the maturity date either. The Partnership has agreed to extend the date by which the Additional Interest, due as of the maturity date, must be paid. Creekside, located in the Portland, Oregon area, continues to operate successfully with occupancy in the mid 90% range. The remaining property, Richmond Park, maintains its position in a stable, older Cleveland suburb. Occupancy generally hovers in the low 90% range, but because the neighborhood does not support significant rental rate increases, the property only generates sufficient cash flow for adequate maintenance and not enough to provide for major capital improvements. The Partnership does not expect to receive any participation interest during 2000 from any of the operating properties. During the first five years, borrowers are prohibited from prepaying the first mortgage loans underlying the PIMs. During the second five years, borrowers may prepay the loans by incurring a prepayment penalty. The Partnership has the option to call certain PIMs by accelerating their maturity if they 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, the interest rate environment and availability of financing will affect those decisions. Results of Operations The following discussion relates to the operation of the Partnership during the three months ended March 31, 2000 and 1999. Net income decreased by approximately $1,039,000 during the three months ended March 31, 2000 as compared to the same period ending 1999. This decrease was due primarily to lower basic interest on PIMs, participation interest on PIMs and interest income on MBS of approximately $858,000, $395,000 and $194,000, respectively. This was partially offset by decreases in asset management fees and amortization expense, of approximately $89,000 and $356,000 respectively. The reduction in basic interest on PIMs is due to the payoff of the Brookside PIM in February, 2000 and the Salishan, Saratoga, Marina Shores, Remington, Pope Building and Valley Manor PIMs in 1999. The decrease in MBS interest income was due to the Patrician MBS prepayment in December, 1999 and the on-going prepayment of the Partnership's single-family MBS. The decrease in participation interest on PIMs was due primarily to the receipt of approximately $922,000 of participation interest from the Pope Building PIM prepayment in February of 1999, as compared to the $196,000 and $307,000 received during the first quarter of 2000 from the Brookside payoff, and the Bell Station payoff, respectively. Asset management fees decreased during the first quarter of 2000 as compared to the same period in 1999 due to the prepayments and principal collections reducing the Partnership's mortgage investments. Amortization expense was greater during the first quarter of 1999 as a result of the full amortization of the remaining prepaid fees and expenses of the Remington and Pope Building PIMs in 1999. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by the Government National Mortgage Association ("GNMA"), Fannie Mae, 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. The Partnership includes in cash and cash equivalents approximately $1.8 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. Interest Rate Risk The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At March 31, 2000, the Partnerships PIMs and MBS comprise the majority of the Partnership's assets. As such, decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold all of its investments to expected maturity. The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, when setting regular distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they mature. KRUPP INSURED MORTGAGE 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 Mortgage Limited Partnership (Registrant) BY: Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus Corporation, a General Partner DATE: April 28, 2000.