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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, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17690
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Krupp Insured Mortgage Limited Partnership
Massachusetts 04-3021395
(State or other jurisdiction of incorporation or organization) (IRS employer identification no.)
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. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
prepayments of mortgages; failure of borrowers to pay participation interests
due to poor operating results of properties underlying the mortgages; uninsured
losses and potential conflicts of interest between the Partnership and its
Affiliates, including the General Partners. The Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 2001, contain additional information concerning such
risk factors. Actual results in the future could differ materially from those
described in any forward-looking statements as a result of the risk factors set
forth above, and the risk factors described in the Annual Report.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
--------------- ---------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 23,572,142 $ 23,723,593
Mortgage-Backed Securities ("MBS") (Note 3) 4,325,329 14,308,403
--------------- ---------------
Total mortgage investments 27,897,471 38,031,996
Cash and cash equivalents 11,427,809 3,603,846
Interest receivable and other assets 203,115 267,672
Prepaid acquisition fees and expenses, net of
accumulated amortization of $623,262 and
$596,986, respectively 4,380 30,656
Prepaid participation servicing fees, net of
accumulated amortization of $205,806 and
$195,430, respectively 1,730 12,106
--------------- ---------------
Total assets $ 39,534,505 $ 41,946,276
=============== ===============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 110,478 $ 17,875
--------------- ---------------
Partners' equity (deficit)(Note 4):
Limited Partners 39,596,626 41,833,148
(14,956,796 Limited Partner interests outstanding)
General Partners (382,129) (377,115)
Accumulated Comprehensive Income 209,530 472,368
--------------- ---------------
Total Partners' equity 39,424,027 41,928,401
--------------- ---------------
Total liabilities and Partners' equity $ 39,534,505 $ 41,946,276
=============== ===============
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,
------------------------------- -------------------------------
2002 2001 2002 2001
------------------------------- -------------------------------
Revenues:
Interest income - PIMs:
Basic interest $ 455,462 $ 513,578 $ 913,108 $ 1,149,019
Participation interest - 19,231 - 19,231
Interest income - MBS 194,697 230,062 453,228 353,322
Other interest income 19,053 34,000 37,238 76,606
------------- ------------- ----------- ------------
Total revenues 669,212 796,871 1,403,574 1,598,178
------------- ------------- ------------ ------------
Expenses:
Asset management fee to an affiliate 44,821 51,897 101,150 117,685
Expense reimbursements to affiliates 33,633 31,098 57,865 56,206
Amortization of prepaid fees
and expenses 18,326 18,328 36,652 36,655
General and administrative 73,435 40,332 121,337 88,703
------------- ------------- ------------ ------------
Total expenses 170,215 141,655 317,004 299,249
------------- ------------- ------------ ------------
Net income 498,997 655,216 1,086,570 1,298,929
Other comprehensive income:
Net change in unrealized gain on MBS (287,282) 182,389 (262,838) 204,284
------------- ------------- ------------ ------------
Total comprehensive income $ 211,715 $ 837,605 $ 823,732 $ 1,503,213
============= ============= ============ ============
Allocation of net income (Note 4):
Limited Partners $ 484,027 $ 635,559 $ 1,053,973 $ 1,259,961
============= ============= ============ ============
Average net income per Limited
Partner interest (14,956,796
Limited Partner interests
outstanding) $ .03 $ .04 $ .07 $ .08
============= ============= ============ ============
General Partners $ 14,970 $ 19,657 $ 32,597 $ 38,968
============= ============= ============ ============
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,
-----------------------------------
2002 2001
--------------- -------------
Operating activities:
Net income $ 1,086,570 $ 1,298,929
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of prepaid fees and expenses 36,652 36,655
Premium amortization - 899
Changes in assets and liabilities:
Decrease in interest receivable and other assets 64,557 24,232
Increase in liabilities 92,603 18,793
--------------- -------------
Net cash provided by operating activities 1,280,382 1,379,508
--------------- -------------
Investing activities:
Principal collections on PIMs 151,451 184,663
Principal collections on MBS 9,720,236 679,997
--------------- -------------
Net cash provided by investing activities 9,871,687 864,660
--------------- -------------
Financing activities:
Quarterly distributions (1,832,427) (1,835,433)
Special distribution (1,495,679) -
--------------- -------------
Net cash used for financing activities (3,328,106) (1,835,433)
---------------- -------------
Net increase in cash and cash equivalents 7,823,963 408,735
Cash and cash equivalents, beginning of period 3,603,846 2,737,740
--------------- -------------
Cash and cash equivalents, end of period $ 11,427,809 $ 3,146,475
=============== =============
Supplemental disclosure of non-cash investing activities:
Reclassification of investment in a PIM to a MBS $ - $ 8,950,340
Non cash activities:
Increase (decrease) in Fair Value of MBS $ (262,838) $ 204,284
=============== =============
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 accounting principles
generally accepted in the United States of America 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, 2001 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 June 30, 2002, its
results of operations for the three and six months ended June 30, 2002
and 2001 and its cash flows for the six months ended June 30, 2002 and
2001.
The results of operations for the three and six months ended June 30,
2002 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 June 30, 2002, the Partnership's PIM portfolio had a fair market value
of $24,920,873 and gross unrealized gains of $1,348,731. The
Partnership's PIMs had maturity dates ranging from 2025 to 2031.
3. MBS
The Partnership received a payoff of the Richmond Park Apartments MBS on
June 17, 2002 for $8,796,086. The Partnership intends to pay a special
distribution of $.59 per Limited Partner interest from the proceeds of
the Richmond Park prepayment in the third quarter of 2002.
At June 30, 2002, the Partnership's MBS portfolio had an amortized cost
of $4,115,799 and gross unrealized gains of $209,530. The MBS portfolio
had 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, 2002 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
-------------- ------------ ------------- -------------
Balance at December 31, 2001 $ 41,833,148 $ (377,115) $ 472,368 $ 41,928,401
Net income 1,053,973 32,597 - 1,086,570
Quarterly distributions (1,794,816) (37,611) - (1,832,427)
Special Distribution (1,495,679) - - (1,495,679)
Change in unrealized gain on MBS - - (262,838) (262,838)
-------------- ------------ ------------- -------------
Balance at June 30, 2002 $ 39,596,626 $ (382,129) $ 209,530 $ 39,424,027
============== ============ ============= =============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-Q constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the Partnership's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors include, among other
things, federal, state or local regulations; adverse changes in general economic
or local conditions; pre-payments of mortgages; failure of borrowers to pay
participation interests due to poor operating results at properties underlying
the mortgages; uninsured losses and potential conflicts of interest between the
Partnership and its Affiliates, including the General Partners.
Liquidity and Capital Resources
At June 30, 2002, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $11.4 million as well as the cash flow provided by
its investments in PIMs and MBS. The Partnership anticipates that these sources
will be adequate to provide the Partnership with sufficient liquidity to meet
its obligation as well as to provide distributions to its investors.
The most significant demand on the Partnership's liquidity is the quarterly
distribution paid to investors of approximately $900,000. Funds for the
quarterly distributions come from monthly principal and interest payments
received on the PIMs and MBS, the principal prepayments of the MBS and interest
earned on the Partnership's cash and cash equivalents. The portion of
distributions attributable to the principal collections and cash reserves
reduces the capital resources of the Partnership. As the capital resources
decrease, the total cash flows to the Partnership will also decrease and over
time 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. To the extent that quarterly distributions do not
fully utilize the cash available for distributions and cash balances increase,
the General Partners may adjust the distribution rate and distribute such funds
through a special distribution. Based on current projections, the General
Partners have determined that the Partnership will continue to pay a
distribution of $.06 per Limited Partner interest per quarter for the near
future.
The Partnership received a payoff of the Richmond Park Apartments MBS on June
17, 2002 for $8,796,086. The Partnership intends to pay a special distribution
of $.59 per Limited Partner interest from the proceeds of the Richmond Park
prepayment in the third quarter of 2002.
On March 1, 2002, the Partnership paid a special distribution of $.10 per
Limited Partner interest due to prepayment of the single family MBS at speeds
greater than previously anticipated.
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 interest in the underlying properties. 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.
The Partnership agreed in December of 2000 to provide debt service relief for
the Wildflower PIM due to the property's poor operating performance in the
competitive Las Vegas market. Occupancy had fallen as low as 80%, and the
property had been unable to generate sufficient revenues to adequately maintain
the property. Consequently, a loan modification agreement between the
Partnership, the borrower entity under the PIM, the principals of the borrower
entity and the affiliated property management agent will provide operating funds
for property repairs. Under the modification, the principals of the borrower
entity converted $105,000 of cash advances to a long-term non-interest-bearing
loan. In addition, an escrow account to be used exclusively for property repairs
was established and is under the control of the Partnership. The management
agent made an initial deposit into the escrow equal to 30% of the management
fees it received during 2000 and will continue to deposit a similar amount until
December 2002. The Partnership made an initial deposit into the escrow account
to match the $105,000 principals' loan and the management agent's initial
deposit and will continue to match additional deposits until December 2002. The
Partnership's contributions to the escrow account will be considered an interest
rebate. The principals' loan and the escrow deposits made by the management
agent and the Partnership can be repaid exclusively out of any Surplus Cash, as
defined by HUD, that the property may generate in future years. Any repayments
will be made on a pro rata basis among the parties.
The Partnership's other remaining PIM investment is backed by the underlying
first mortgage loan on Creekside. Located in the Portland, Oregon area, the
property has maintained occupancy in the mid to high 90% range over the past
several years. However, with flat rental rates and increasing expenses, it does
not generate any cash flow that can be distributed as participation interest,
nor has the value of the property increased sufficiently for the Partnership to
share in any participation interest based on value. Furthermore, Clackamas
County is undertaking an extensive road improvement project adjacent to
Creekside. The borrower has learned that the design of the new road interchange
will require a significant portion of the property be taken by eminent domain,
possibly including some of the apartment buildings. The borrower is contesting
the condemnation action on the basis that the compensation award will not fully
compensate ownership for the adverse effects the road widening will have on the
remaining portion of the property. He expects that the legal proceedings will be
complicated and lengthy, particularly since the property is security for an
FHA-insured participating mortgage. Consequently, during the second quarter of
2002 the borrower gave notice to the Partnership that it will pay off the first
mortgage loan by utilizing the ownership entity's short-term credit lines. The
Partnership does not expect to receive any participation interest as a result of
this payoff transaction.
The Partnership has the option to call these 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.
Critical Accounting Policy
The Partnership's critical accounting policy relates primarily to revenue
recognition related to the participation feature of the Partnership's PIM
investments. The Partnership's policy is as follows:
Basic interest on PIMs is recognized based on the stated rate of the FHA
mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA
MBS. The Partnership recognizes interest related to the participation features
when the amount becomes fixed and the transaction that gives rise to such amount
is consummated.
Results of Operations
Net income decreased in the three months ended June 30, 2002 as compared to June
30, 2001 primarily due to lower basic interest on PIMs, MBS interest income and
other interest income. This decrease was also due to an increase in general and
administrative expenses and was partially offset by a decrease in asset
management fees. Basic interest on PIMs decreased primarily due to the
reclassification of the Richmond Park PIM to a MBS in May 2001. MBS interest
income decreased primarily due to the prepayment of the single family MBS at
speeds greater than previously anticipated. Other interest income decreased due
to significantly lower average cash balances available for short-term investing
and the interest rates earned on those balances in the three-month period versus
the same period last year. General and administrative expenses were higher in
2002 when compared to 2001 due to the overpayment of 2000 processing costs that
were refunded in 2001. Asset management fees decreased due to the decrease in
the Partnership's investments as a result of principal collections from MBS and
PIMs.
Net income decreased in the six months ended June 30, 2002 as compared to June
30, 2001 primarily due to lower basic interest on PIMs and other interest income
and an increase in general and administrative expenses. This decrease was
partially offset by an increase in MBS interest income and a decrease in asset
management fees. Basic interest on PIMs decreased primarily due to the
reclassification of the Richmond Park PIM to a MBS in May 2001. Other interest
income decreased due to significantly lower average cash balances available for
short-term investing and the interest rates earned on those balances in the
six-month period versus the same period last year. General and administrative
expenses were higher in 2002 when compared to 2001 due to the overpayment of
2000 processing costs that were refunded in 2001. MBS interest income increased
due to the Richmond Park reclassification. Asset management fees decreased due
to the decrease in the Partnership's investments as a result of principal
collections from MBS and PIMs.
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 $11 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 June
30, 2002, the Partnership's PIMs and MBS comprised the majority of the
Partnership's assets. 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
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Principal Executive Officer Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(99.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
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 13, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Insured Mortgage Limited
Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Douglas Krupp, Co-Chariman (Principal Executive Officer),
President and Director of Krupp Plus Corporation, a General Partner of the
Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership as of June 30, 2002 (the last
date of the period covered by the Report).
/ s / Douglas Krupp
- ---------------------------
Douglas Krupp,
Principal Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Insured Mortgage Limited
Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert A. Barrows, Chief Accounting Officer of Krupp Plus
Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership as of June 30, 2002 (the last
date of the period covered by the Report).
/ s / Robert A. Barrows
- -----------------------------
Robert A. Barrows,
Chief Accounting Officer