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, 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 (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 MORTGAGE LIMITED PARTNERSHIP BALANCE SHEETS ASSETS June 30, December 31, 2000 1999 Participating Insured Mortgages ("PIMs") (Note2) $ 33,203,556 $ 51,390,092 Mortgage-Backed Securities ("MBS") (Note 3) 6,882,761 7,460,112 Total mortgage investments 40,086,317 58,850,204 Cash and cash equivalents 2,689,229 39,434,806 Interest receivable and other assets 190,333 187,363 Prepaid acquisition fees and expenses, net of accumulated amortization of $518,157 and $3,151,323, respectively 109,484 184,416 Prepaid participation servicing fees, net of accumulated amortization of $164,299 and $1,033,292, respectively 43,237 69,702 Total assets $ 43,118,600 $ 98,726,491 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 11,136 $ 19,550 Partners' equity (deficit): Limited Partners 43,502,692 99,051,048 (14,956,796 Limited Partner interests outstanding) General Partners (365,314) (347,682) Accumulated comprehensive (loss) income (29,914) 3,575 Total Partners' equity 43,107,464 98,706,941 Total liabilities and Partners' equity $ 43,118,600 $ 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 For the Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Revenues: Interest income - PIMs: Basic interest $ 702,603 $ 1,605,150 $ 1,627,673 $ 3,388,244 Participation interest 414,045 22,864 941,003 945,302 Interest income - MBS 137,454 320,798 283,999 661,250 Other interest income 74,614 159,870 208,119 315,776 Total revenues 1,328,716 2,108,682 3,060,794 5,310,572 Expenses: Asset management fee to an affiliate 84,281 170,336 195,815 371,005 Expense reimbursements to affiliates 32,685 29,238 59,881 34,170 Amortization of prepaid fees and expenses 26,194 242,892 101,397 673,839 General and administrative expenses 101,858 53,498 142,865 103,073 Total expenses 245,018 495,964 499,958 1,182,087 Net income 1,083,698 1,612,718 2,560,836 4,128,485 Other comprehensive income: Net change in unrealized loss on MBS (15,465) (328,140) (33,489) (414,986) Total comprehensive income $ 1,068,233 $ 1,284,578 $ 2,527,347 $ 3,713,499 Allocation of net income (Note 4): Limited Partners $ 1,051,187 $ 1,564,336 $ 2,484,011 $ 4,004,630 Average net income per Limited Partner interest (14,956,796 Limited Partner interests outstanding) $ .07 $ .11 $ .17 $ .27 General Partners $ 32,511 $ 48,382 $ 76,825 $ 123,855 The accompanying notes are an integral part of the financial statements. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2000 1999 Operating activities: Net income $ 2,560,836 $ 4,128,485 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 101,397 673,839 Shared Appreciation Interest and prepayment premium income (499,093) (703,860) Changes in assets and liabilities: (Increase) decrease in interest receivable and other assets (2,970) 118,145 Decrease in liabilities (8,414) (21,794) Net cash provided by operating activities 2,151,756 4,194,815 Investing activities: Principal collections on PIMs including Shared Appreciation Interest and prepayment premium income of $499,093 in 2000 and $703,860 in 1999 18,685,629 16,542,684 Principal collections on MBS 543,862 1,749,567 Net cash provided by investing activities 19,229,491 18,292,251 Financing activities: Special distributions (53,994,032) (26,024,825) Quarterly distributions (4,132,792) (6,434,133) Net cash used for financing activities (58,126,824) (32,458,958) Net decrease in cash and cash equivalents (36,745,577) (9,971,892) Cash and cash equivalents, beginning of period 39,434,806 15,117,466 Cash and cash equivalents, end of period $ 2,689,229 $ 5,145,574 Non cash activities: Decrease in Fair Value of MBS $ (33,489) $ (414,986) 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 primarily of normal recurring accruals) necessary to present fairly the Partnership's financial position as of June 30, 2000, its results of operations for the three and six months ended June 30, 2000 and 1999 and its cash flows for the six months ended June 30, 2000 and 1999. The results of operations for the three and six months ended June 30, 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 June 2, 2000, the Partnership paid a special distribution of $.93 per Limited Partner interest from the Bell Station and Enclave PIM payoffs along with the Shared Appreciation Interest proceeds from the Brookside PIM (see below). On March 30, 2000, the Partnership received $190,239 of Shared Appreciation Interest and $5,973 of Shared Income Interest from the Bell Station PIM. During April, the Partnership received the principal proceeds of $4,901,863 from the Bell Station PIM. During May, the Partnership received the principal proceeds of $8,508,892 from the Enclave PIM. The underlying first mortgage loan matured on May 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 $178,854 of Shared Appreciation Interest and $200,398 of Shared Income Interest during June. 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. 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. In addition to the payoffs mentioned above, the Partnership received Shared Income Interest of $24,233 from the Enclave PIM during February and $34,793 from the Creekside PIM during June. At June 30, 2000, the Partnership's PIM portfolio has a fair market value of $33,148,806 and gross unrealized gains and losses of $98,003 and $152,753 , respectively. The Partnership's PIMs have maturities ranging from 2024 to 2031. KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued 3. MBS As of June 30, 2000, the Partnership's MBS portfolio has an amortized cost of $6,912,675 and gross unrealized gains and losses of $99,537 and $129,451, respectively. The MBS portfolio has maturity dates ranging from 2016 to 2024. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the six months ended June 30, 2000 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income(Loss) Equity Balance at December 31, 1999 $ 99,051,048 $ (347,682) $ 3,575 $ 98,706,941 Net income 2,484,011 76,825 - 2,560,836 Quarterly distributions (4,038,335) (94,457) - (4,132,792) Special distributions (53,994,032) - - (53,994,032) Change in unrealized loss on MBS - - (33,489) (33,489) Balance at June 30, 2000 $ 43,502,692 $ (365,314) $ (29,914) $ 43,107,464 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 $900,000. 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 pay a distribution of $.06 per Limited Partner interest per quarter. 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 June 2, 2000, the Partnership paid a special distribution of $.93 per Limited Partner interest from the Bell Station and Enclave PIM payoffs along with the Shared Appreciation Interest proceeds from the Brookside PIM (see below). On March 30, 2000, the Partnership received $190,239 of Shared Appreciation Interest and $5,973 of Shared Income Interest from the Bell Station PIM. During April, the Partnership received the principal proceeds of $4,901,863 from the Bell Station PIM. During May, the Partnership received the principal proceeds of $8,508,892 from the Enclave PIM. The underlying first mortgage loan matured on May 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 $178,854 of Shared Appreciation Interest and $200,398 of Shared Income Interest. 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 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. In addition to the payoffs mentioned above, the Partnership received Shared Income Interest of $24,233 from the Enclave PIM during February and $34,793 from the Creekside PIM during June. 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 Creekside and Richmond Park. 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 more participation interest during 2000 from the remaining 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 and six months ended June 30, 2000 and 1999. Net income decreased by approximately $529,000 during the three months ended June 30, 2000 when compared to the same period in 1999. This decrease was primarily due to the decrease in PIM basic interest which resulted from the payoffs of the Enclave, Bell Station, Brookside, Salishan, Saratoga, Marina Shores and Valley Manor PIMs and the decrease in MBS interest income which resulted from the payoff of the Patrician MBS along with principal collections received on the single-family MBS net of the increase in participation interest received from PIM payoffs. Net income decreased by $1,568,000 during the six months ended June 30, 2000 when compared to the same period in 1999. This decrease was primarily due to the decrease in PIM basic interest which was a result of the payoffs of the Remington and Pope Building PIMs plus those already mentioned above and the decrease in MBS interest income which was a result of the items mentioned above. 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 $1.8million 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 June 30, 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: / s / Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus Corporation, a General Partner DATE: August 5, 2000