UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
June 30, December 31,
2001 2000
--------------- ---------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 23,869,071 $ 33,004,074
Mortgage-Backed Securities ("MBS") (Note 3) 15,114,126 6,640,398
--------------- ---------------
Total mortgage investments 38,983,197 39,644,472
Cash and cash equivalents 3,146,475 2,737,740
Interest receivable and other assets 268,138 292,370
Prepaid acquisition fees and expenses, net of
accumulated amortization of $570,711 and
$544,434, respectively 56,931 83,208
Prepaid participation servicing fees, net of
accumulated amortization of $185,054 and
$174,676, respectively 22,482 32,860
--------------- ---------------
Total assets $ 42,477,223 $ 42,790,650
=============== ===============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 36,443 $ 17,650
--------------- ---------------
Partners' equity (deficit)(Note 4):
Limited Partners 42,451,788 42,986,643
(14,956,796 Limited Partner interests
outstanding)
General Partners (375,277) (373,628)
Accumulated comprehensive income 364,269 159,985
--------------- ---------------
Total Partners' equity 42,440,780 42,773,000
--------------- ---------------
Total liabilities and Partners' equity $ 42,477,223 $ 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 For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------------------------- ------------ ------------
Revenues:
Interest income - PIMs:
Basic interest $ 513,578 $ 702,603 $ 1,149,019 $ 1,627,673
Participation interest 19,231 414,045 19,231 941,003
Interest income - MBS 230,062 137,454 353,322 283,999
Other interest income 34,000 74,614 76,606 208,119
------------- ------------- ----------- ------------
Total revenues 796,871 1,328,716 1,598,178 3,060,794
------------- ------------- ------------ ------------
Expenses:
Asset management fee to an affiliate 51,897 84,281 117,685 195,815
Expense reimbursements to affiliates 31,098 32,685 56,206 59,881
Amortization of prepaid fees
and expenses 18,328 26,194 36,655 101,397
General and administrative 40,332 101,858 88,703 142,865
------------- ------------- ------------ ------------
Total expenses 141,655 245,018 299,249 499,958
------------- ------------- ------------ ------------
Net income 655,216 1,083,698 1,298,929 2,560,836
Other comprehensive income:
Net change in unrealized gain/loss
on MBS 182,389 (15,465) 204,284 (33,489)
------------- ------------- ------------ ------------
Total comprehensive income $ 837,605 $ 1,068,233 $ 1,503,213 $ 2,527,347
============= ============= ============ ============
Allocation of net income (Note 4):
Limited Partners $ 635,559 $ 1,051,187 $ 1,259,961 $ 2,484,011
============= ============= ============ ============
Average net income per
Limited Partner interest
(14,956,796 Limited
Partner interests
outstanding) $ .04 $ .07 $ .08 $ .17
============= ============= ============ ============
General Partners $ 19,657 $ 32,511 $ 38,968 $ 76,825
============= ============= ============ ============
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
-----------------------------------
2001 2000
--------------- -------------
Operating activities:
Net income $ 1,298,929 $ 2,560,836
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of prepaid fees and expenses 36,655 101,397
Premium amortization 899 -
Shared Appreciation Interest and prepayment premium income - (499,093)
Changes in assets and liabilities:
Decrease (increase) in interest receivable and
other assets 24,232 (2,970)
Increase (decrease) in liabilities 18,793 (8,414)
--------------- -------------
Net cash provided by operating activities 1,379,508 2,151,756
--------------- -------------
Investing activities:
Principal collections on PIMs including Shared
Appreciation Interest and prepayment premium income
of $499,093 in 2000 184,663 18,685,629
Principal collections on MBS 679,997 543,862
--------------- -------------
Net cash provided by investing activities 864,660 19,229,491
--------------- -------------
Financing activities:
Special distributions - (53,994,032)
Quarterly distributions (1,835,433) (4,132,792)
--------------- -------------
Net cash used for financing activities (1,835,433) (58,126,824)
--------------- -------------
Net increase (decrease) in cash and cash equivalents 408,735 (36,745,577)
Cash and cash equivalents, beginning of period 2,737,740 39,434,806
--------------- -------------
Cash and cash equivalents, end of period $ 3,146,475 $ 2,689,229
=============== =============
Supplemental disclosure of non-cash investing activities:
Reclassification of investment in a PIM to a MBS $ 8,950,340 $ -
=============== =============
Non cash activities:
Increase (decrease) in Fair Value of MBS $ 204,284 $ (33,489)
=============== ============= =============== =========
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 June 30, 2001, its results of operations for the three
and six months ended June 30, 2001 and 2000 and its cash flows for the six
months ended June 30, 2001 and 2000.
The results of operations for the three and six months ended June 30, 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
During May 2001, the Partnership received $19,231 from the borrowers of the
Richmond Park PIM as a settlement to release the loan’s participation
features. The property has never generated sufficient cash flow to pay any
participation from property operations nor does it have sufficient value to meet
the threshold to pay any participation based on value if the property is sold or
refinanced. The borrowers asked for a release of the participation features
while keeping the insured first mortgage in place until the property turns
around. The General Partners agreed to this request in return for the settlement
because there was no expectation that the Partnership would be entitled to any
participation proceeds now or in the future in the property’s current
condition. As a result, the insured first mortgage loan on Richmond Park was
reclassified from a PIM to a MBS, and the Partnership will continue to receive
the scheduled principal and interest payments on the first mortgage until the
property is refinanced or sold.
At June 30, 2001, the Partnerships PIM portfolio had a fair market value of
$24,673,568 and gross unrealized gains of $804,497. The Partnership’s PIMs
have maturities ranging from 2025 to 2031.
3. MBS
As of June 30, 2001, the Partnership’s MBS portfolio had an amortized cost
of $14,749,857 and gross unrealized gains of $364,269. The MBS portfolio has
maturities ranging from 2016 to 2024.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended
June 30, 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 1,259,961 38,968 - 1,298,929
Quarterly distributions (1,794,816) (40,617) - (1,835,433)
Change in unrealized gain on MBS - - 204,284 204,284
------------- ----------- ------------- --------------
Balance at June 30, 2001 $ 42,451,788 $ (375,277) $ 364,269 $ 42,440,780
============= ============ ============ ==============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly 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
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.
During May 2001, the Partnership received $19,231 from the borrowers of the Richmond Park PIM as a settlement to release the loan’s participation features. The property has never generated sufficient cash flow to pay any participation from property operations nor does it have sufficient value to meet the threshold to pay any participation based on value if the property is sold or refinanced. In the property’s present condition, there is little likelihood that its status will improve. Vacancy levels have begun to increase, and rental rate increases have been difficult to achieve. Consequently, all of the cash flow generated by the property has gone back into operations. While the borrower has assured that the insured first mortgage debt has been serviced, no major capital improvements have been undertaken that would enhance the property’s leasing efforts. Furthermore, routine maintenance and repairs were beginning to be prioritized according to need and available cash. The condition of the property and its inability to generate sufficient cash flow has seriously impaired the ability of the borrower to either sell the property or refinance it without taking a loss. The borrower’s business plan is to make a significant investment in the property to correct deferred maintenance and functional obsolescence and to market it for leasing in order to reposition the property for a successful sale or refinance. The borrowers were unwilling to make the large investment necessary while the property was encumbered with the PIM’s participation features. The borrowers asked for a release of the participation features while keeping the insured first mortgage in place until the property turns around. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property’s current condition. The insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS, and the Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold.
The Partnership agreed to provide debt service relief in December of 2000 for the Wildflower PIM due to the property’s poor operating performance in the competitive Las Vegas market. Occupancy had fallen as low as 80%, and the property had been unable to generate sufficient revenues to adequately maintain the property. Consequently, a loan modification agreement between the Partnership, the borrower entity under the PIM, the principals of the borrower entity and the affiliated property management agent will provide operating funds for property repairs. Under the modification, the principals of the borrower entity converted $105,000 of cash advances to a long-term non-interest-bearing loan. In addition, an escrow account to be used exclusively for property repairs was established and is under the control of the Partnership. The management agent made an initial deposit into the escrow equal to 30% of the management fees it received during 2000 and will continue to deposit a similar amount until December 2002. The Partnership made an initial deposit into the escrow account to match the $105,000 principals’ loan and the management agent’s initial deposit and will continue to match additional deposits until December 2002. The Partnership’s contributions to the escrow account will be considered an interest rebate. The principals’ loan and the escrow deposits made by the management agent and the Partnership can be repaid exclusively out of any Surplus Cash, as defined by HUD, that the property may generate in future years. Any repayments will be made on a pro rata basis among the parties.
The Partnership’s other remaining PIM investment is backed by the underlying first mortgage loan on Creekside. Presently, the General Partners do not expect Creekside to pay the Partnership any participation interest or to be sold or refinanced during 2001. However, if favorable market conditions provide the borrower an opportunity to sell the property, 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 major changes to the property during 2001, but eventually, property operations could be affected by the road project.
The Partnership has the option to call these PIMs by accelerating their maturity if they are not prepaid by the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Such factors as the condition of the asset, local market conditions, the interest rate environment and availability of financing will affect those decisions.
Results of Operations
Net income decreased in the three months ended June 30, 2001 as compared to June 30, 2000 primarily due to lower basic interest income and participation interest on PIMs. This decrease was partially offset by an increase in MBS interest income and decreases in general and administrative expenses and asset management fees. Basic interest on PIMs decreased due to the payoff of the Enclave PIM in May 2000 and the reclassification of the Richmond Park PIM to an MBS in May 2001. Participation interest was higher during the second quarter of 2000 due to amounts collected in connection with the Enclave PIM payoff. MBS interest income increased due to the Richmond Park reclassification. General and administrative expenses were greater during the second quarter of 2000 due to higher processing costs. The decrease in asset management fees is a result of the Partnership’s asset base declining from the PIM prepayments.
Net income decreased during the six months ended June 30, 2001 as compared to June 30, 2000 primarily due to lower basic interest income and participation interest on PIMs and other interest income. This was partially offset by an increase in MBS interest income and decreases in general and administrative expenses, 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 and the reclassification of the Richmond Park PIM to a MBS in May 2001. Participation interest was higher during the first six months of 2000 due to amounts collected in connection with the PIM payoffs received during that period. Other interest income decreased due to significantly lower average cash balances available for short-term investing in the six month period ended June 30, 2001 versus the same period last year. MBS interest income increased due to the Richmond Park reclassification. General and administrative expenses were greater during the first six months of 2000 due to higher processing costs. 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 six months ended June 30, 2000 as compared to June 30, 2001 as a result of the full amortization of the remaining prepaid fees and expenses on the PIM prepayments in the first six months of 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAssessment 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.
At June 30, 2001 the Partnership included in cash and cash equivalents approximately $1.1 million held in a money market fund which invests in securities which are primarily direct obligations of the U.S. Government or securities issued by agencies and instrumentalities of the U.S. Government which may be guaranteed, supported or backed by the credit of the U.S. Government or agencies thereof.
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, 2001, the Partnerships PIMs and MBS comprised 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: / s / Robert A. Barrows
---------------------------------------
Robert A. Barrows
Treasurer and Chief Accounting Officer of
Krupp Plus Corporation, a General Partner
DATE: August 3, 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
June 30, 2001 and the period from inception through June 30, 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.
Six Months Inception
Ended Through
6/30/01 6/30/01
---------- -----------
(Amounts in thousands, except per Unit amounts)
Distributable Cash Flow:
- -----------------------
Net Income on a GAAP Basis $ 1,299 $ 150,419
Items not requiring or (not providing) the use
of operating funds:
Shared Appreciation Interest - (5,716)
Amortization of prepaid fees and expenses 37 19,231
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") $ 1,337 $ 163,702
========= ===========
Limited Partners Share of DCF $ 1,297 $ 158,791
========= ===========
Limited Partners Share of DCF per Unit $ .09 $ 10.62(c)
========= ===========
General Partners Share of DCF $ 40 $ 4,911
========= ===========
Net Proceeds from Capital Transactions:
- --------------------------------------
Prepayments and principal collections on PIMs
including Shared Appreciation Interest $ 185 $ 161,241
Principal collections on MBS 681 79,333
Principal collections on MBS and PIMs
reinvested - (14,537)
Gain on sale of MBS - 417
--------- -----------
Total Net Proceeds from Capital Transactions $ 866 $ 226,454
========= ===========
Cash available for distribution
- -------------------------------
(DCF plus proceeds from Capital
Transactions) $ 2,203 $ 390,156
========= ===========
Distributions:
- -------------
Limited Partners $ 1,795(a) $ 382,601(b)
========= ===========
Limited Partners Average per Unit $ .12(a) $ 25.58(b)(c)
======== ===========
General Partners $ 40(a) $ 4,911(b)
======== ===========
Total Distributions $ 1,835 $ 387,512
======== ===========
(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 August 2001.
(b) Includes an estimate of the quarterly distribution to be paid in August 2001.
(c) Limited Partners average per Unit return of capital as of August 2001 is
$14.96 [$25.58- $10.62]. 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.