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 March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17690
Krupp Insured Mortgage Limited Partnership
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-3021395
(IRS employer identification no.)
One Beacon Street, Boston, Massachusetts
(Address of principal executive offices)
02108
(Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP BALANCE SHEETS ASSETS March 31, December 31, 2001 2000 -------------- ------------ Participating Insured Mortgages ("PIMs") (Note 2) $ 32,901,323 $ 33,004,074 Mortgage-Backed Securities ("MBS")(Note 3) 6,435,569 6,640,398 -------------- ------------ Total mortgage investments 39,336,892 39,644,472 Cash and cash equivalents 2,815,309 2,737,740 Interest receivable and other assets 275,852 292,370 Prepaid acquisition fees and expenses, net of accumulated amortization of $557,572 and $544,434, respectively 70,070 83,208 Prepaid participation servicing fees, net of accumulated amortization of $179,865 and $174,676 respectively 27,671 32,860 -------------- ------------ Total assets $ 42,525,794 $ 42,790,650 ============== ============ LIABILITIES AND PARTNERS' EQUITY Liabilities $ 5,313 $ 17,650 -------------- ------------- Partners' equity (deficit) (Note 4): Limited Partners (14,956,796 Limited Partner interests outstanding) 42,713,637 42,986,643 General Partners (375,036) (373,628) Accumulated comprehensive income 181,880 159,985 -------------- ------------- Total Partners' equity 42,520,481 42,773,000 -------------- ------------- Total liabilities and partners' equity $ 42,525,794 $ 42,790,650 ============== ============ The accompanying notes are an integral part of the financial statements.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Three Months Ended March 31, -------------------------------------------- 2001 2000 -------------- -------------- Revenues: Interest income - PIMs: Basic interest $ 635,441 $ 925,070 Participation interest - 526,958 Interest income - MBS 123,260 146,545 Other interest income 42,606 133,505 ------------- ------------- Total revenues 801,307 1,732,078 ------------- ------------ Expenses: Asset management fee to an affiliate 65,788 111,534 Expense reimbursements to affiliates 25,108 27,196 Amortization of prepaid fees and expenses 18,327 75,203 General and administrative 48,371 41,007 ------------- ------------ Total expenses 157,594 254,940 ------------- ------------ Net income 643,713 1,477,138 Other comprehensive income: Net change in unrealized gain on MBS 21,895 (18,024) ------------- ------------- Total comprehensive income $ 665,608 $ 1,459,114 ============= ============= Allocation of net income (Note 4): Limited Partners $ 624,402 $ 1,432,824 ============= ============ Average net income per Limited Partner interest (14,956,796 Limited Partner interests outstanding) $ .04 $ .10 ============= ============ General Partners $ 19,311 $ 44,314 ============= ============ The accompanying notes are an integral part of the financial statements.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, ---------------------------------------------- 2001 2000 -------------- -------------- Operating activities: Net income $ 643,713 $ 1,477,138 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 18,327 75,203 Shared Appreciation Interest - (320,239) Premium amortization 1,131 - Changes in assets and liabilities: Decrease (increase) in interest receivable and other assets 16,518 (176,395) Decrease in liabilities (12,337) (5,329) -------------- ------------ Net cash provided by operating activities 667,352 1,050,378 -------------- ----------- Investing activities: Principal collections on PIMs 102,751 4,990,747 Principal collections on MBS 225,593 239,962 -------------- ------------ Net cash provided by investing activities 328,344 5,230,709 -------------- ------------ Financing activities: Quarterly distributions (918,127) (3,198,421) Special distributions - (40,084,212) -------------- ------------ Net cash used for financing activities (918,127) (43,282,633) -------------- ----------- Net increase (decrease) in cash and cash equivalents 77,569 (37,001,546) Cash and cash equivalents, beginning of period 2,737,740 39,434,806 -------------- ------------ Cash and cash equivalents, end of period $ 2,815,309 $ 2,433,260 ============== ============= Non cash activities: Increase (decrease) in fair value of MBS $ 21,895 $ (18,024) ============== ============= The accompanying notes are an integral part of the financial statements.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in the opinion of the General Partners, Krupp Plus Corporation and Mortgage Services Partners Limited Partnership, (collectively the “General Partners”) of Krupp Insured Mortgage Limited Partnership (the “Partnership”), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Financial Statements included in the Partnership’s Form 10-K for the year ended December 31, 2000 for additional information relevant to significant accounting policies followed by the Partnership.
In the opinion of the General Partners of the Partnership, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Partnership’s financial position as of March 31, 2001, and its results of operations and cash flows for the three months ended March 31, 2001 and 2000.
Theresults of operations for the three months ended March 31, 2001 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 March 31, 2001, the Partnerships PIM portfolio has a fair market value of $33,808,789 and gross unrealized gains of $907,466. The Partnership’s PIMs have maturities ranging from 2024 to 2031.
3. MBS
As of March 31, 2001, the Partnership’s MBS portfolio has an amortized cost of $6,253,689 and gross unrealized gains and losses of $182,062 and $182,respectively. The MBS portfolio has maturity dates ranging from 2016 to 2024.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the three months ended March 31, 2001 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity -------- -------- ----------- ------------ Balance at December 31, 2000 $ 42,986,643 $ (373,628) $ 159,985 $ 42,773,000 Net income 624,402 19,311 - 643,713 Quarterly distributions (897,408) (20,719) - (918,127) Change in unrealized gain on MBS - - 21,895 21,895 ------------- ----------- ------------ --------------- Balance at March 31, 2001 $ 42,713,637 $ (375,036) $ 181,880 $ 42,520,481 ============= =========== ============ ============== Continued
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The most significant demand on the Partnership's liquidity is the regular quarterly distribution paid to investors of approximately $900,000. Funds used for the investor distributions are generated from interest income received on the PIMs, MBS, cash and short-term investments and the principal collections received on the PIMs and MBS. The Partnership funds a portion of the quarterly distribution from principal collections causing the capital resources of the Partnership to continually decrease. As a result of the decrease, the total cash inflows to the Partnership will also decrease, which 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. Based on current projections the General Partners have determined that the Partnership will pay a distribution of $.06 per Limited Partner interest per quarter.
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 feature in the underlying properties if they operate successfully. 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 to provide debt service relief for the Wildflower PIM due to the property's poor operating performance in the competitive Las Vegas market. Occupancy has fallen as low as 80%, and the property has 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 has been 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 amongst the parties.
The Partnership's only other remaining PIM investments are backed by the underlying first mortgage loans on Creekside and Richmond Park. Presently, the General Partners do not expect either of these properties to pay the Partnership any participation interest or to be sold or refinanced during 2001. However, if favorable market conditions provide the borrowers an opportunity to sell their properties, there are no contractual obligations remaining that would prevent a prepayment of the underlying first mortgage. Creekside, located in the Portland, Oregon area, continues to operate successfully with occupancy in the mid-90% range. However, Clackamas County is undertaking an extensive road improvement project adjacent to Creekside, and a portion of the property may be taken during the road's construction. The Partnership does not expect any changes to the property during 2001, but eventually, property operations could be affected by the road project. The remaining property, Richmond Park, maintains its position in a stable, older Cleveland suburb. Occupancy generally hovers in the low 90% range, but because the neighborhood does not support significant rental rate increases, the property only generates sufficient cash flow for adequate maintenance and not enough to provide for major capital improvements.
The Partnership has the option to call certain 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.
Results of Operations
The following discussion relates to the operation of the Partnership during the three months ended March 31, 2001 and 2000.
Net income decreased during the three months ended March 31, 2001 as compared to March 31, 2000 due primarily to lower basic interest income and participation interest on PIMs and other interest income. This was partially offset by decreases in asset management fees and amortization expense. Basic interest on PIMs decreased due to the payoffs of the Enclave, Bell Station and Brookside PIMs in 2000. Participation interest decreased due to the receipt of participation interest in the first quarter of 2000 on the Bell Station and Brookside PIMs. The Partnership did not receive any participation interest in the first quarter of 2001 from its remaining PIMs. Other interest income decreased due to significantly lower average cash balances available for short-term investing in the three month period versus the same period last year. The decrease in asset management fees is a result of the Partnership's asset base declining from the PIM prepayments. Amortization expense was greater during the three months ended March 31, 2000 as compared to March 31, 2001 as a result of the full amortization of the remaining prepaid fees and expenses on the PIM prepayments in the first quarter of 2000.
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 $2.6 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 March 31, 2001, the Partnerships PIMs and MBS comprise the majority of the Partnership's assets. As such, 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 Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Krupp Insured Mortgage Limited Partnership ------------------------------------------ (Registrant) BY: ------------------------------------- Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus Corporation, a General Partner DATE: April 27, 2001.
Unaudited Distributable Cash Flow and Net Cash Proceeds from Capital Transactions Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions as defined in Section 17 of the Partnership Agreement (on a GAAP basis) and the source of cash distributions for the quarter ended March 31, 2001 and the period from inception through March 31, 2001. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership’s operating performance or to cash flows as a measure of liquidity. Quarter Inception Ended Through 3/31/01 3/31/01 ----------- ------------- (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: - ----------------------- Net Income on a GAAP Basis $ 644 $ 149,764 Items not requiring or (not providing) the use of operating funds: Shared Appreciation Interest - (5,716) Amortization of prepaid fees and expenses 18 19,212 Premium Amortization 1 1 Acquisition expenses paid from offering proceeds charged to operations - 184 Gain on sale of MBS - (417) --------- ----------- - Total Distributable Cash Flow ("DCF") $ 663 $ 163,028 ========= ============ Limited Partners Share of DCF $ 643 $ 158,137 ========= =========== Limited Partners Share of DCF per Unit $ .04 $ 10.57(c) ========= ============= General Partners Share of DCF $ 20 $ 4,891 ========= ============ Net Proceeds from Capital Transactions: - -------------------------------------- Prepayments and principal collections on PIMs including Shared Appreciation Interest $ 103 $ 161,159 Principal collections on MBS 226 78,878 Principal collections on MBS and PIMs - (14,537) reinvested Gain on sale of MBS - 417 ------------ ------------ Total Net Proceeds from Capital Transactions $ 329 $ 225,917 ========= ============ Cash available for distribution - ------------------------------- (DCF plus proceeds from Capital Transactions) $ 992 $ 388,945 ========= ============ Distributions: - ------------- Limited Partners $ 897(a) $ 381,703 ========= ============ Limited Partners Average per Unit $ .06(a) $ 25.52(b)(c) =========== ============= General Partners $ 20(a) $ 4,891(b) =========== ============= Total Distributions $ 917 $ 386,594 ========= ============ (a) Represents all distributions paid in 2001 except the February 2001 quarterly distribution and includes an estimate of the quarterly distribution to be paid in May 2001. (b) Includes an estimate of the quarterly distribution to be paid in May 2001. (c) Limited Partners average per Unit return of capital as of May 2001 is $14.95 [$25.52 - $10.57]. Return of capital represents that portion of distributions which is not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs.