10-Q 1 d56593_10q.txt FORM 10-Q 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| -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; 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. -2- 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. -3- 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 ============ ============ ============ ============
-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 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 -13-