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 March 31, 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 0-17690 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, 1999 1998 Participating Insured Mortgages ("PIMs") (Note 2) $ 83,331,693 $ 98,950,663 Mortgage-Backed Securities ("MBS")(Note 3) 17,778,730 18,806,870 Total mortgage investments 101,110,423 117,757,533 Cash and cash equivalents 22,084,461 15,117,466 Interest receivable and other assets 710,799 786,165 Prepaid acquisition fees and expenses, net of accumulated amortization of $6,300,222 and $7,184,808, respectively 840,311 1,167,020 Prepaid participation servicing fees, net of accumulated amortization of $1,874,694 and $2,170,982, respectively 280,872 385,110 Total assets $ 125,026,866 $135,213,294 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 512,852 $ 30,794 Partners' equity (deficit): Limited Partners (14,956,796 Limited Partner interests outstanding) 124,277,254 134,849,373 General Partners (321,581) (312,060) Accumulated comprehensive income 558,341 645,187 Total Partners' equity 124,514,014 135,182,500 Total liabilities and partners' equity $ 125,026,866 $135,213,294 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, 1999 1998 Revenues: Interest income - PIMs: Base interest $ 1,783,094 $ 2,174,277 Participation interest 922,438 31,364 Interest income - MBS 340,452 437,913 Other interest income 155,906 62,129 Total revenues 3,201,890 2,705,683 Expenses: Asset management fee to an affiliate 200,669 215,203 Expense reimbursements to affiliates 4,932 43,236 Amortization of prepaid fees and expenses 430,947 316,143 General and administrative expenses 49,575 69,971 Total expenses 686,123 644,553 Net income 2,515,767 2,061,130 Other comprehensive income: Net change in unrealized gain on MBS (86,846) (187,383) Total comprehensive income $ 2,428,921 $ 1,873,747 Allocation of net income (Note 4): Limited Partners $ 2,440,294 $ 1,999,296 Average net income per Limited Partner interest (14,956,796 Limited Partner interests outstanding) $ .16 $ .13 General Partners $ 75,473 $ 61,834 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, 1999 1998 Operating activities: Net income $ 2,515,767 $ 2,061,130 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 430,947 316,143 Shared appreciation income (703,860) - Changes in assets and liabilities: Decrease in interest receivable and other assets 75,366 43,119 Increase (decrease) in liabilities 482,058 (95,978) Net cash provided by operating activities 2,800,278 2,324,414 Investing activities: Principal collections on PIMs including shared appreciation and prepayment premium income of $703,860 in 1999 16,322,830 260,151 Principal collections on MBS 941,294 967,691 Net cash provided by investing activities 17,264,124 1,227,842 Financing activities: Quarterly distributions (3,225,921) (4,577,623) Special distributions (9,871,486) (16,751,611) Net cash used for financing activities (13,097,407) (21,329,234) Net increase (decrease) in cash and cash equivalents 6,966,995 (17,776,978) Cash and cash equivalents, beginning of period 15,117,466 20,480,666 Cash and cash equivalents, end of period $ 22,084,461 $ 2,703,688 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 this 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 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, 1999, and its results of operations and cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 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 During March 1999, the Partnership received a payoff of the Remington PIM in the amount of $12,199,298. The payoff was the result of a default on the underlying loan which resulted in the Partnership receiving all of the outstanding principal balance under the insurance feature of the PIM. However, due to the default the Partnership did not receive any participation income from this PIM. During February 1999, the Partnership received a payoff of the Pope Building PIM in the amount of $3,176,761. In addition, the Partnership received $703,860 of Shared Appreciation and prepayment premium income and $218,578 of Shared Income and Minimum Additional Interest upon the payoff of the underlying mortgage. During May 1999 the Partnership will pay a special distribution of $1.08 per Limited Partner interest from the principal proceeds, Shared Appreciation and prepayment proceeds received from Remington and the Pope Building. During January 1999, the Partnership paid a special distribution of $.66 per Limited Partner interest from the principal proceeds and prepayment proceeds received from Cross Creek during 1998. At March 31, 1999, the Partnership=s PIM portfolio has a fair market value of approximately $85,796,000 and gross unrealized gains of $2,465,000. The Partnership=s PIMs have maturities ranging from 2000 to 2032. 3. MBS As of March 31, 1999, the Partnership's MBS portfolio has an amortized cost of $17,220,389 and gross unrealized gains of $558,341. The MBS portfolio has maturity dates ranging from 1999 to 2027. 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, 1999 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity Balance at December 31, 1998 $ 134,849,373 $(312,060) $ 645,187 $ 135,182,500 Net income 2,440,294 75,473 - 2,515,767 Quarterly distributions (3,140,927) (84,994) - (3,225,921) Special distributions (9,871,486) - - (9,871,486) Decrease in unrealized gain on MBS - - (86,846) (86,846) Balance at March 31, 1999 $ 124,277,254 $(321,581) $ 558,341 $ 124,514,014 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 General Partners of 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 significant internal 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. The General Partners of the Partnership are in the process of surveying these third party providers and assessing their readiness with year 2000. To date, the Partnership is not aware of any problems that would materially impact its results of operations, liquidity or capital resources. However, the Partnership has not yet obtained all written assurances that these providers would be Year 2000 ready. The Partnership currently does not have a contingency plan in the event of a particular provider or system not being Year 2000 ready. Such plan will be developed if it becomes clear that a provider is not going to achieve its scheduled readiness objectives by June 30, 1999. The inability of one of these providers to complete its Year 2000 resolution process could impact the Partnership. In addition, 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. To date, the Partnership has not incurred any cost associated with being Year 2000 ready. All costs have been incurred by the General Partners, and it is estimated that any future Year 2000 readiness costs will be borne by the General Partners. 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 quarterly distributions paid to investors. The quarterly distribution is $.21 per unit or approximately $3.14 million. Funds used for 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 this decrease, the total cash inflows to the Partnership will also decrease, which will result in periodic adjustments to the distributions paid to investors. During March 1999, the Partnership received a payoff of the Remington PIM in the amount of $12,199,298. The payoff was the result of default on the underlying loan which resulted in the Partnership receiving all of the outstanding principal balance under the insurance feature of the PIM. However, due to the default the Partnership did not receive any participation income from this PIM. During February 1999, the Partnership received a payoff of the Pope Building PIM in the amount of $3,176,761. In addition, the Partnership received $703,860 of Shared Appreciation and prepayment premium income and $218,578 of Shared Income and Minimum Additional Interest upon the payoff of the underlying mortgage. During May 1999 the Partnership will pay a special distribution of $1.08 per Limited Partner interest from the principal proceeds, Shared Appreciation and prepayment proceeds received from Remington and the Pope Building. During January 1999, the Partnership paid a special distribution of $.66 per Limited Partner interest from the principal proceeds and prepayment proceeds received from Cross Creek during 1998. The General Partners estimate that the Partnership can maintain the quarterly distribution rate of $.21 per limited partner interest for the near future. However, in the event of further 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. The participation features of the PIMs are neither insured nor guaranteed and if repayment of a PIM results from an insurance claim the Partnership would 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") and the 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 $21.1 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. Operations The following discussion relates to the operations of the Partnership during the three months ended March 31, 1999 and 1998. Net income increased by $455,000 during the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. The increase was primarily due to an $891,000 increase in participation interest on PIMs and a $94,000 increase in other interest income net of a $391,000 decrease in base interest on PIMs, a $97,000 decrease in MBS interest income and a $115,000 increase in amortization of prepaid fees and expenses. The increase in participation interest on PIMs was due to the receipt of participation interest from the Pope Building payoff during the first quarter of 1999. Other interest income increased as a result of higher average short-term investments held during the first quarter of 1999 as compared to the same period in 1998. The decrease in base interest on PIMs was due to the payoffs of Remington and the Pope Building in 1999 and the payoffs of Deering Place and Cross Creek in 1998. MBS interest income decreased due to the on-going prepayment of the Partnership's single-family MBS. Amortization of prepaid fees and expenses increased as the Partnership fully amortized the remaining prepaid fees and expenses related to Remington and the Pope Building. The Partnership funds a portion of its 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 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: April 23, 1999.