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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 June 30, 2003
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
(Exact name of registrant as specified in its charter)
Massachusetts 04-3021395
(State or other jurisdiction of (IRS employer
incorporation or organization) 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |_| No |X|
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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, 2002, 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.
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KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
June 30, December 31,
2003 2002
------------ ------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 15,396,382 $ 23,414,472
Mortgage-Backed Securities ("MBS") (Note 3) 2,403,620 3,422,980
------------ ------------
Total mortgage investments 17,800,002 26,837,452
Cash and cash equivalents 2,882,047 2,816,834
Interest receivable and other assets 121,726 187,588
------------ ------------
Total assets $ 20,803,775 $ 29,841,874
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 64,506 $ 47,465
------------ ------------
Partners' equity (deficit)(Note 4):
Limited Partners
(14,956,796 Limited Partner interests outstanding) 20,937,270 29,966,538
General Partners (387,069) (381,100)
Accumulated comprehensive income 189,068 208,971
------------ ------------
Total Partners' equity 20,739,269 29,794,409
------------ ------------
Total liabilities and partners' equity $ 20,803,775 $ 29,841,874
============ ============
The accompanying notes are an integral
part of the financial statements.
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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,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Interest income - PIMs:
Basic interest $ 407,157 $ 455,462 $ 866,671 $ 913,108
Interest income - MBS 47,443 194,697 106,731 453,228
Other interest income 14,985 19,053 33,005 37,238
----------- ----------- ----------- -----------
Total revenues 469,585 669,212 1,006,407 1,403,574
----------- ----------- ----------- -----------
Expenses:
Asset management fee to an affiliate 33,975 44,821 63,756 101,150
Expense reimbursements to affiliates 36,414 33,633 109,809 57,865
Amortization of prepaid fees and expenses -- 18,326 -- 36,652
General and administrative 40,403 73,435 118,771 121,337
----------- ----------- ----------- -----------
Total expenses 110,792 170,215 292,336 317,004
----------- ----------- ----------- -----------
Net income 358,793 498,997 714,071 1,086,570
Other comprehensive income:
Net change in unrealized gain on MBS (43,844) (287,282) (19,903) (262,838)
----------- ----------- ----------- -----------
Total comprehensive income $ 314,949 $ 211,715 $ 694,168 $ 823,732
=========== =========== =========== ===========
Allocation of net income (Note 4):
Limited Partners $ 348,029 $ 484,027 $ 692,649 $ 1,053,973
=========== =========== =========== ===========
Average net income per Limited
Partner interest (14,956,796
Limited Partner interests outstanding) $ .03 $ .03 $ .05 $ .07
=========== =========== =========== ===========
General Partners $ 10,764 $ 14,970 $ 21,422 $ 32,597
=========== =========== =========== ===========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
-----------------------------
2003 2002
------------ ------------
Operating activities:
Net income $ 714,071 $ 1,086,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid fees and expenses -- 36,652
Changes in assets and liabilities:
Decrease in interest receivable and other assets 65,862 64,557
Increase in liabilities 17,041 92,603
------------ ------------
Net cash provided by operating activities 796,974 1,280,382
------------ ------------
Investing activities:
Principal collections on PIMs 8,018,090 151,451
Principal collections on MBS 999,457 9,720,236
------------ ------------
Net cash provided by investing activities 9,017,547 9,871,687
------------ ------------
Financing activities:
Quarterly distributions (1,822,206) (1,832,427)
Special distributions (7,927,102) (1,495,679)
------------ ------------
Net cash used for financing activities (9,749,308) (3,328,106)
------------ ------------
Net increase in cash and cash equivalents 65,213 7,823,963
Cash and cash equivalents, beginning of period 2,816,834 3,603,846
------------ ------------
Cash and cash equivalents, end of period $ 2,882,047 $ 11,427,809
============ ============
Non cash activities:
Decrease in unrealized gain on MBS $ (19,903) $ (262,838)
============ ============
The accompanying notes are an integral
part of the financial statements.
-5-
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, 2002 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, 2003, its results of
operations for the three and six months ended June 30, 2003 and 2002 and
its cash flows for the six months ended June 30, 2003 and 2002.
The results of operations for the three and six months ended June 30, 2003
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, 2003, the Partnership estimated that the GNMA MBS portion of
the Wildflower PIM had a fair value of $15,396,382. Fair value is based on
expected payoff proceeds from the GNMA MBS and does not include any value
for the participation feature. The Partnership's PIM matures in 2025 and
at June 30, 2003 was not delinquent as to principal or interest.
On June 2, 2003, the Partnership received a payoff of the Creekside
Apartments PIM for $7,859,546. The underlying property value did not
increase sufficiently to meet the criteria for the Partnership to earn any
participating interest. On June 23, 2003, the Partnership paid a special
distribution of $0.53 per Limited Partner interest from the proceeds
received.
3. MBS
At June 30, 2003, the Partnership's MBS portfolio had an amortized cost of
$2,214,552 and gross unrealized gains of $189,068. The MBS portfolio has
maturity dates ranging from 2016 to 2024.
Continued
-6-
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended June 30,
2003 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------ ------------ ------------- ------------
Balance at December 31, 2002 $ 29,966,538 $ (381,100) $ 208,971 $ 29,794,409
Net income 692,649 21,422 -- 714,071
Quarterly distributions (1,794,815) (27,391) -- (1,822,206)
Special distribution (7,927,102) -- -- (7,927,102)
Change in unrealized gain on MBS -- -- (19,903) (19,903)
------------ ------------ ------------ ------------
Balance at June 30, 2003 $ 20,937,270 $ (387,069) $ 189,068 $ 20,739,269
============ ============ ============ ============
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and accompanying notes contained in the Partnership's 2002
Annual Report on Form 10-K and in this Form 10-Q.
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, 2003, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $2.9 million as well as the cash flow provided by
its investment in its remaining PIM and MBS. The Partnership anticipates that
these sources will be adequate to provide the Partnership with sufficient
liquidity to meet its obligations 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 scheduled monthly principal and interest
payments received on the remaining PIM 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.
On June 2, 2003, the Partnership received a payoff of the Creekside Apartments
PIM for $7,859,546. The underlying property value did not increase sufficiently
to meet the criteria for the Partnership to earn any participating interest. On
June 23, 2003, the Partnership paid a special distribution of $0.53 per Limited
Partner interest from the proceeds received.
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 was entered into
between the Partnership, the borrower entity under the PIM, the principals of
the borrower entity and the affiliated property management agent, which provided
operating funds for property repairs. At December 31, 2002 the repairs were
complete, and the property's occupancy was 90%. 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 was 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 continued to
deposit a similar amount through the end of the modification. 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 continued to
match additional deposits through the end of the modification. The Partnership's
contributions to the escrow account have been accounted for as 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 effective interest rate
after the interest rebate was equivalent to the then prevailing rate for similar
instruments.
The borrower on the Wildflower PIM is seeking to refinance the property. The
Partnership expects that this loan will be paid off during the third quarter of
2003. In addition, the Partnership expects to receive the interest rate rebate
of approximately $250,000 when the loan is paid off. At this time it is unclear
if the Partnership will be entitled to receive any proceeds from the
participation feature of the PIM.
-8-
In the event that the Wildflower PIM is paid off, the Partnership would then
commence an orderly liquidation of the remaining assets of the Partnership and
subsequently pay a liquidating distribution.
In addition to providing insured or guaranteed monthly principal and basic
interest payments from the GNMA MBS portion of the PIM, the Partnership's
remaining PIM investment also may provide additional income through its
participation interest in the underlying property. 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 property is 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.
In the event that the remaining PIM does not pay off as discussed above, the
Partnership does have the option to call this PIM by accelerating its maturity.
If the call feature is exercised for both the participation feature and the MBS
portion of the PIM then the insurance feature of the loan would be canceled.
Therefore, the Partnership would determine the merits of exercising the call
option for the PIM as economic conditions warrant. Such factors as the condition
of the asset, local market conditions, the interest rate environment and
availability of financing would affect those decisions.
Critical Accounting Policies
The Partnership's critical accounting policies relate to revenue recognition
related to the Partnership's PIM investments, amortization of Prepaid Fees and
Expenses and the carrying value of MBS. The Partnership's policies are as
follows:
The Partnership accounts for its MBS portion of a PIM investment in accordance
with the Financial Accounting Standards Board's Statement 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"), under the
classification of held to maturity as this investment has a participation
feature. As a result, the Partnership would not sell or otherwise dispose of the
MBS. Accordingly, the Partnership has both the intention and ability to hold
this investment to expected maturity. The Partnership carries this MBS at
amortized cost. The Partnership held the insured mortgage portion of its Federal
Housing Administration (FHA) PIM at amortized cost and did not establish loan
loss reserves as this investment was fully insured by the FHA. The Partnership,
in accordance with FAS 115, classifies its MBS portfolio as available-for-sale.
The Partnership classifies its MBS portfolio as available-for-sale as the
Partnership expects that a portion of the MBS portfolio will remain after the
remaining PIM pays off and that it will be necessary to then sell the remaining
MBS portfolio at that time in order to close out the Partnership. In addition,
other situations such as liquidity needs could arise which would necessitate the
sale of a portion of the MBS portfolio. As such the Partnership carries its MBS
at fair market value and reflects any unrealized gains (losses) as a separate
component of Partners' Equity. The Partnership amortizes purchase premiums or
discounts over the life of the underlying mortgages using the effective interest
method.
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 finalized, cash is received and all contingencies are resolved. This could be
the sale or refinancing of the underlying real estate, which results in a cash
payment to the Partnership or a cash payment made to the Partnership from
surplus cash relative to the participation feature.
Prepaid fees and expenses represented prepaid acquisition fees and expenses and
prepaid participation servicing fees paid for the acquisition and servicing fees
of PIMs. The Partnership amortized prepaid acquisition fees and expenses using a
method that approximated the effective interest method over a period of ten to
twelve years, which represented the estimated life of the underlying mortgage.
Acquisition expenses incurred on potential acquisitions which were not
consummated were charged to operations. The Partnership amortized prepaid
participation servicing fees using a method that approximated the effective
interest method over a ten-year period beginning at final endorsement of the
loan if a Department of Housing and Urban Development ("HUD") loan or GNMA loan.
Upon the repayment of a PIM, any unamortized acquisition fees and expenses and
unamortized participation servicing fees related to such loan were expensed.
Results of Operations
Net income decreased in the three months ended June 30, 2003 as compared to June
30, 2002 primarily due to decreases in MBS interest income and basic interest on
PIMs. This decrease was partially offset by decreases in general and
administrative expenses and amortization expense. The decrease in MBS interest
income is due to the Richmond Park payoff in June 2002 and on-going
single-family MBS principal collections. Basic interest on PIMs decreased
primarily due to the Creekside payoff in June 2003. General and administrative
expenses decreased primarily due to a change in
-9-
the estimated cost of services provided to the Partnership in 2002. Amortization
expense decreased due to the remaining prepaid fees and expenses on the
Creekside PIM being fully amortized as of July 2002.
Net income decreased in the six months ended June 30, 2003 as compared to June
30, 2002 primarily due to decreases in MBS interest income and basic interest on
PIMs and an increase in expense reimbursements to affiliates. This decrease was
partially offset by decreases in asset management fees and amortization expense.
The decrease in MBS interest income is due to the Richmond Park payoff in June
2002 and on-going single-family MBS principal collections. Basic interest on
PIMs decreased primarily due to the Creekside payoff in June 2003. Expense
reimbursements to affiliates increased primarily due to a change in the
estimated cost of services provided to the Partnership in 2002. Asset management
fees decreased due to the decrease in the Partnership's investments as a result
of principal collections and payoffs. Amortization expense decreased due to the
remaining prepaid fees and expenses on the Creekside PIM being fully amortized
as of July 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Partnership's investments in MBS and the MBS portion of its remaining PIM
are guaranteed and/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. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States, and both have significant experience in mortgage
securitizations. In addition, their MBS carry the highest credit rating given to
financial instruments. 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.
At June 30, 2003, the Partnership includes in cash and cash equivalents
approximately $2.5 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, 2003, the Partnership's remaining PIM and MBS comprise the majority of the
Partnership's assets. Decreases in interest rates may accelerate the prepayment
of the Partnership's investments. Increases in interest rates may decrease the
proceeds from a sale of the MBS. The Partnership does not utilize any
derivatives or other instruments to manage this risk as the Partnership plans to
hold its remaining PIM investment to expected maturity, while it is expected
that substantially all of the MBS will prepay over the same time period, thereby
mitigating any potential interest rate risk to the disposition value of any
remaining MBS.
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 its remaining PIM, the Partnership incorporates prepayment
assumptions into planning as the property notifies the Partnership of the intent
to prepay or as it matures.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Senior Vice President and Chief Accounting Officer of Krupp Plus Corporation, a
general partner of the Partnership, carried out an evaluation of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures. Based upon that evaluation, the Senior Vice President
and the Chief Accounting Officer concluded that the Partnership's disclosure
controls and procedures were effective as of the date of their evaluation in
timely alerting them to material information relating to the Partnership
required to be included in this Quarterly Report on Form 10-Q.
-10-
(b) Changes in Internal Controls
There were no significant changes in the Partnership's internal controls or in
other factors that could significantly affect such internal controls subsequent
to the date of the evaluation described in paragraph (a) above.
-11-
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
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
(31.1) Senior Vice President Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(31.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(32.1) Senior Vice President Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(32.2) 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
-12-
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/ Alan Reese
-----------------------------------------
Alan Reese
Treasurer and Chief Accounting Officer of
Krupp Plus Corporation, a General Partner
DATE: August 6, 2003
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