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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 September 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 0-15815
Krupp Insured Plus Limited Partnership
(Exact name of registrant as specified in its charter)
Massachusetts 04-2915281
(State or other jurisdiction of (I.R.S. 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)
N/A
(Former name, former address and former fiscal year, if
changed since last report)
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 Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
SEC 1296 (08-03) Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
-1-
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;
pre-payments 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.
-2-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
BALANCE SHEETS
-------------------------
ASSETS
September 30, December 31,
2003 2002
------------- ------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 13,030,110 $ 13,112,739
Mortgage-Backed Securities and insured mortgages
("MBS") (Note 3) 688,317 9,164,511
------------ ------------
Total mortgage investments 13,718,427 22,277,250
Cash and cash equivalents 794,664 573,389
Interest receivable and other assets 86,258 142,887
------------ ------------
Total assets $ 14,599,349 $ 22,993,526
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 18,261 $ 34,942
------------ ------------
Partners' equity (deficit)(Note 4):
Limited Partners
(7,500,099 Limited Partner interests outstanding) 14,779,357 22,509,510
General Partners (249,468) (242,538)
Accumulated comprehensive income 51,199 691,612
------------ ------------
Total Partners' equity 14,581,088 22,958,584
------------ ------------
Total liabilities and Partners' equity $ 14,599,349 $ 22,993,526
============ ============
The accompanying notes are an integral
part of the financial statements.
-3-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
-------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Interest income - PIMs:
Basic interest $ 240,415 $ 242,416 $ 722,780 $ 767,500
Participation interest -- -- -- 504,639
Interest income - MBS 14,341 181,184 265,568 548,922
Other interest income 6,193 4,601 24,149 26,985
----------- ----------- ----------- -----------
Total revenues 260,949 428,201 1,012,497 1,848,046
----------- ----------- ----------- -----------
Expenses:
Asset management fee to an affiliate 25,936 41,076 96,154 126,125
Expense reimbursements to affiliates 16,167 15,003 64,996 40,728
Amortization of prepaid fees and expenses -- 24,444 -- 73,335
General and administrative 27,734 21,893 83,348 71,353
----------- ----------- ----------- -----------
Total expenses 69,837 102,416 244,498 311,541
----------- ----------- ----------- -----------
Net income 191,112 325,785 767,999 1,536,505
Other comprehensive income:
Net change in unrealized gain on MBS (10,412) 126,657 (640,413) 165,532
----------- ----------- ----------- -----------
Total comprehensive income $ 180,700 $ 452,442 $ 127,586 $ 1,702,037
=========== =========== =========== ===========
Allocation of net income (Note 4):
Limited Partners $ 185,379 $ 316,012 $ 744,959 $ 1,490,410
=========== =========== =========== ===========
Average net income per Limited Partner
interest (7,500,099 Limited Partner
interests outstanding) $ .03 $ .04 $ .10 $ .20
=========== =========== =========== ===========
General Partners $ 5,733 $ 9,773 $ 23,040 $ 46,095
=========== =========== =========== ===========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
-------------------------
For the Nine Months
Ended September 30,
-----------------------------
2003 2002
----------- -----------
Operating activities:
Net income $ 767,999 $ 1,536,505
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid fees and expenses -- 73,335
Shared Appreciation Interest -- (378,480)
Changes in assets and liabilities:
Decrease in interest receivable and other assets 56,629 45,963
Decrease in liabilities (16,681) (1,938)
----------- -----------
Net cash provided by operating activities 807,947 1,275,385
----------- -----------
Investing activities:
Principal collections on MBS 7,835,781 362,671
Principal collections on PIMs including Shared Appreciation
Interest of $378,480 in 2002 82,629 6,018,688
----------- -----------
Net cash provided by investing activities 7,918,410 6,381,359
----------- -----------
Financing activities:
Quarterly distributions (1,004,983) (2,290,868)
Special distributions (7,500,099) (6,000,079)
----------- -----------
Net cash used for financing activities (8,505,082) (8,290,947)
----------- -----------
Net increase (decrease) in cash and cash equivalents 221,275 (634,203)
Cash and cash equivalents, beginning of period 573,389 1,422,582
----------- -----------
Cash and cash equivalents, end of period $ 794,664 $ 788,379
=========== ===========
Non cash activities:
Increase (decrease) in unrealized gain on MBS $ (640,413) $ 165,532
=========== ===========
The accompanying notes are an integral
part of the financial statements.
-5-
KRUPP INSURED PLUS 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, The Krupp Corporation and The Krupp Company Limited
Partnership-IV (collectively the "General Partners"), of Krupp Insured
Plus 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 September 30, 2003, its results
of operations for the three and nine months ended September 30, 2003 and
2002 and its cash flows for the nine months ended September 30, 2003 and
2002.
The results of operations for the three and nine months ended September
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 September 30, 2003, the FHA insured mortgage portion of the
Partnership's remaining PIM had a fair value of $13,030,110. Fair value
assumes that the FHA insured first mortgage could be sold at a price that
MBS with similar interest rates are currently being sold at. Fair value
does not include any value for the PIM's participation feature. The PIM
matures in 2033 and at September 30, 2003 was not delinquent as to
principal or interest.
3. MBS
At September 30, 2003, the Partnership's MBS portfolio had an amortized
cost of $637,118 and gross unrealized gains of $51,199. The portfolio has
maturities ranging from 2007 to 2019.
On June 16, 2003, the Partnership received a prepayment of the Briar Ridge
Apartments MBS. The Partnership received $5,558,394, representing the
principal proceeds on the first mortgage. A prepayment premium was not
required from the payoff of the MBS as the prepayment provisions of the
MBS expired at the end of April 2003. On July 24, 2003, the Partnership
paid a special distribution of $0.75 per Limited Partner interest from the
proceeds received.
On February 18, 2003, the Partnership received a prepayment of the Mission
Terrace Apartments MBS. The Partnership received $1,873,040, representing
the principal proceeds on the first mortgage. A prepayment premium was not
required from the payoff of the MBS as the prepayment provisions of the
MBS expired in April of 1997. On May 5, 2003, the Partnership paid a
special distribution of $0.25 per Limited Partner interest from the
proceeds received.
Continued
-6-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-------------------------
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the nine months ended
September 30, 2003 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------ ------------ ------------- ------------
Balance at December 31, 2002 $ 22,509,510 $ (242,538) $ 691,612 $ 22,958,584
Net income 744,959 23,040 767,999
Quarterly distributions (975,013) (29,970) -- (1,004,983)
Special distributions (7,500,099) -- -- (7,500,099)
Change in unrealized gain on MBS -- -- (640,413) (640,413)
------------ ------------ ------------ ------------
Balance at September 30, 2003 $ 14,779,357 $ (249,468) $ 51,199 $ 14,581,088
============ ============ ============ ============
-7-
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 report on Form 10-Q.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report on 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 September 30, 2003, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $800,000 as well as the cash flow provided by its
investments 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 $225,000. 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 or
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 rate of $0.03 per Limited Partner interest per
quarter for the near future.
On June 16, 2003, the Partnership received a prepayment of the Briar Ridge
Apartments MBS. The Partnership received $5,558,394, representing the principal
proceeds on the first mortgage. A prepayment premium was not required from the
payoff of the MBS as the prepayment provisions of the MBS expired at the end of
April 2003. On July 24, 2003, the Partnership paid a special distribution of
$0.75 per Limited Partner interest from the proceeds received.
On February 18, 2003, the Partnership received a prepayment of the Mission
Terrace Apartments MBS. The Partnership received $1,873,040, representing the
principal proceeds on the first mortgage. A prepayment premium was not required
from the payoff of the MBS as the prepayment provisions of the MBS expired in
April of 1997. On May 5, 2003, the Partnership paid a special distribution of
$0.25 per Limited Partner interest from the proceeds received.
In addition to providing insured monthly principal and basic interest payments
from the insured first mortgage portion of the PIM, the Partnership's investment
in the remaining PIM also may provide additional income through a 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 payment is not insured and is dependent upon whether property
operations or its terminal value meet certain criteria.
The Partnership's only remaining PIM investment is backed by the first mortgage
loan on Vista Montana. Due to the declining economic conditions currently
affecting the Phoenix, Arizona sub-market, the occupancy rate at the property is
currently 90%. The owner has lowered rents and is offering move-in concessions
in an effort to increase occupancy. Presently, the General Partners do not
expect Vista Montana to pay the Partnership any participation interest during
2003. The borrower has indicated that they are considering refinancing the
property in 2003, however the Partnership does not expect a payoff to occur
prior to year-end. There are no contractual obligations remaining that would
prevent a prepayment of the underlying first mortgage.
-8-
The Partnership has the option to call its remaining PIM by accelerating the
maturity date of the loan. If the call feature is exercised for the whole PIM
then the insurance feature of the loan would be cancelled. Therefore, the
Partnership will determine the merits of exercising the call option 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.
Critical Accounting Policies
The Partnership's critical accounting policies relate primarily to revenue
recognition related to the Partnership's remaining PIM investment, the
amortization of Prepaid Fees and Expenses and the carrying value of the MBS. The
Partnership's policies are as follows:
The Partnership holds the insured mortgage portion of its Federal Housing
Administration PIM (FHA PIM) at amortized cost and does not establish loan loss
reserves as this investment is fully insured by the FHA. Basic interest on PIMs
is recognized at the stated rate of its Federal Housing Administration insured
mortgage (less the servicer's fee). 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.
The Partnership accounts for its MBS portfolio in accordance with Financial
Accounting Standards Board's Statement 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115") under the classification of
available-for-sale. The Partnership classifies its MBS portfolio as
available-for-sale as a portion of the MBS portfolio may remain after all of the
PIMs pay 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.
Prepaid fees and expenses represented prepaid acquisition fees and expenses and
prepaid participation servicing fees paid for the acquisition and servicing of
PIMs. The Partnership amortized the 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.
The Partnership amortized the prepaid participation servicing fees using a
method that approximated the effective interest method over a ten year period
beginning from the acquisition of the Fannie Mae MBS or final endorsement of the
FHA 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 for the three months ended September 30, 2003 as compared
to the same period ending September 30, 2002 primarily due to a decrease in MBS
interest income. This decrease is partially offset by decreases in asset
management fees and amortization expense. MBS interest income decreased due to
the payoffs of the Mission Terrace Apartments MBS in February 2003 and the Briar
Ridge Apartments MBS in June 2003. Asset management fees decreased due to the
decline in the Partnership's asset base as a result of principal collections and
prepayments. Amortization expense decreased due to the prepaid fees and expenses
associated with the Vista Montana PIM being fully amortized as of the end of
2002.
Net income decreased for the nine months ended September 30, 2003 as compared to
the same period ending September 30, 2002. This decrease is primarily due to
decreases in participation interest, MBS interest income and an increase in
expense reimbursement to affiliates. These are partially offset by a decrease in
amortization expense. Participation interest was greater in 2002 due to the
collection of Shared Appreciation Interest and Minimum Additional Interest from
the Royal Palm Place PIM payoff in February 2002. MBS interest income decreased
primarily due to the prepayments of the Mission Terrace Apartments MBS in
February 2003 and the Briar Ridge Apartments MBS in June 2003. Expense
reimbursement to affiliates increased primarily due to a change in the estimated
cost of services provided to the Partnership in 2002. Amortization expense
decreased due to the prepaid fees and expenses associated with the Vista Montana
PIM being fully amortized as of the end of 2002.
-9-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Partnership's investments in its insured mortgage portion of its PIM and its
MBS 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 September 30, 2003 the Partnership includes in cash and cash equivalents
approximately $300,000 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
September 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 fund 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 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.
(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.
-10-
KRUPP INSURED PLUS 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
-11-
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 Plus Limited Partnership
(Registrant)
BY: / s / Alan Reese
--------------------------------------------
Alan Reese
Vice-President (Chief Accounting Officer) of
The Krupp Corporation, a General Partner of
the Registrant.
DATE: October 30, 2003
-12-