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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 0-17690
Krupp Insured Mortgage Limited Partnership
(Exact name of registrant as specified in its charter)
Massachusetts 04-3021395
(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; 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
STATEMENT OF NET ASSETS IN LIQUIDATION AT SEPTEMBER 30, 2003
AND
BALANCE SHEET AT DECEMBER 31, 2002
--------------------
ASSETS
September 30, December 31,
2003 2002
------------- ------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 15,328,844 $ 23,414,472
Mortgage-Backed Securities ("MBS") (Notes 3 and 5) 2,024,175 3,422,980
------------ ------------
Total mortgage investments 17,353,019 26,837,452
Cash and cash equivalents 3,634,336 2,816,834
Interest receivable and other assets 118,418 187,588
------------ ------------
Total assets $ 21,105,773 $ 29,841,874
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 352,425 $ 47,465
------------ ------------
Partners' equity (deficit)(Note 4):
Limited Partners
(14,956,796 Limited Partner interests outstanding) 20,976,965 29,966,538
General Partners (368,850) (381,100)
Accumulated comprehensive income 145,233 208,971
------------ ------------
Total net assets in liquidation at September 30, 2003 and
total Partner's equity at December 31, 2002 $ 20,753,348 29,794,409
============ ------------
Total liabilities and Partner's equity $ 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
(In Liquidation as of September 30, 2003)
--------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Interest income - PIMs:
Basic interest $ 547,745 $ 458,149 $ 1,414,416 $ 1,371,257
Participation interest 780,000 -- 780,000 --
Interest income - MBS 41,404 78,593 148,135 531,821
Other interest income 7,700 42,169 40,705 79,407
----------- ----------- ----------- -----------
Total revenues 1,376,849 578,911 2,383,256 1,982,485
----------- ----------- ----------- -----------
Expenses:
Asset management fee to an affiliate 38,979 40,850 102,735 142,000
Expense reimbursements to affiliates 36,414 33,633 146,223 91,498
Estimated costs of liquidation (Note 1) 282,518 -- 282,518 --
Amortization of prepaid fees and expenses -- 6,110 -- 42,762
General and administrative 52,851 36,223 171,622 157,560
----------- ----------- ----------- -----------
Total expenses 410,762 116,816 703,098 433,820
----------- ----------- ----------- -----------
Net income 966,087 462,095 1,680,158 1,548,665
Other comprehensive income:
Net change in unrealized gain on MBS (43,835) 15,694 (63,738) (247,144)
----------- ----------- ----------- -----------
Total comprehensive income $ 922,252 $ 477,789 $ 1,616,420 $ 1,301,521
=========== =========== =========== ===========
Allocation of net income (Note 4):
Limited Partners $ 937,104 $ 448,232 $ 1,629,753 $ 1,502,205
=========== =========== =========== ===========
Average net income per Limited
Partner interest (14,956,796
Limited Partner interests outstanding) $ .06 $ .03 $ .11 $ .10
=========== =========== =========== ===========
General Partners $ 28,983 $ 13,863 $ 50,405 $ 46,460
=========== =========== =========== ===========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(In Liquidation as of September 30, 2003)
--------------------
For the Nine Months
Ended September 30,
-------------------------------
2003 2002
------------ ------------
Operating activities:
Net income $ 1,680,158 $ 1,548,665
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid fees and expenses -- 42,762
Shared Appreciation Interest (546,000) --
Changes in assets and liabilities:
Decrease in interest receivable and other assets 69,170 76,302
Increase (decrease) in liabilities 304,960 (1,935)
------------ ------------
Net cash provided by operating activities 1,508,288 1,665,794
------------ ------------
Investing activities:
Principal collections on PIMs including Shared Appreciation Interest
of $546,000 in 2003 8,631,628 229,493
Principal collections on MBS 1,335,067 10,045,111
------------ ------------
Net cash provided by investing activities 9,966,695 10,274,604
------------ ------------
Financing activities:
Quarterly distributions (2,730,379) (2,745,355)
Special distributions (7,927,102) (10,320,189)
------------ ------------
Net cash used for financing activities (10,657,481) (13,065,544)
------------ ------------
Net increase (decrease) in cash and cash equivalents 817,502 (1,125,146)
Cash and cash equivalents, beginning of period 2,816,834 3,603,846
------------ ------------
Cash and cash equivalents, end of period $ 3,634,336 $ 2,478,700
============ ============
Non cash activities:
Decrease in unrealized gain on MBS $ (63,738) $ (247,144)
============ ============
The accompanying notes are an integral
part of the financial statements.
-5-
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(In Liquidation as of September 30, 2003)
--------------------
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.
As a result of the payoff of the Wildflower Apartments PIM on September
26, 2003, the Partnership is in the process of winding up its business,
which it expects to complete in the fourth quarter of 2003. The
Partnership will sell its remaining MBS and then make a Terminating
Capital Transaction distribution to the partners. In connection therewith,
the Partnership has changed its basis of accounting as of September 30,
2003 from the going-concern basis to the liquidation basis of accounting.
The liquidation basis of accounting requires that assets and liabilities
be stated at their estimated net realizable value and that estimated costs
of liquidating the Partnership be provided to the extent that they are
reasonably determinable. The Partnership estimates that the costs to
liquidate will be approximately $282,518, which primarily relates to the
remaining general and administrative expenses to be incurred through the
anticipated liquidation of the Partnership in December 2003.
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
On September 26, 2003, the borrower of the Wildflower Apartments PIM paid
off the Subordinated Promissory Note and the GNMA MBS. On September 26,
2003, the Partnership received $546,000 of Shared Appreciation Interest
and $234,000 of Minimum Additional Interest. In addition, the Partnership
received $250,310, which represents a return of the interest rate rebate
which had previously been recorded as a reduction in basic interest. On
October 15, 2003, the Partnership received $15,328,844 from the GNMA MBS
related to Wildflower. On October 29, 2003, the Partnership paid a special
distribution of $1.07 per Limited Partner interest from the proceeds
received.
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 September 30, 2003, the Partnership's MBS portfolio had an amortized
cost of approximately $1,878,942, a face value of $1,887,266 and gross
unrealized gains of approximately $145,233. The MBS portfolio has maturity
dates ranging from 2016 to 2024.
Continued
-6-
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
(In Liquidation as of September 30, 2003)
--------------------
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 Partner's
Partners Partners Income Equity
------------ ------------ ------------- ------------
Balance at December 31, 2002 $ 29,966,538 $ (381,100) $ 208,971 $ 29,794,409
Net income 1,629,753 50,405 -- 1,680,158
Quarterly distributions (2,692,224) (38,155) -- (2,730,379)
Special distribution (7,927,102) -- -- (7,927,102)
Change in unrealized gain on MBS -- -- (63,738) (63,738)
------------ ------------ ------------ ------------
Balance at September 30, 2003 $ 20,976,965 $ (368,850) $ 145,233 $ 20,753,348
============ ============ ============ ============
5. Subsequent Event
On October 15, 2003, the Partnership sold its remaining MBS portfolio for
$1,897,129, including accrued interest of $5,525. The gain realized from
the sale was $145,233.
At the time of the sale, the MBS portfolio had an amortized cost of
$1,746,373 and a face value of $1,753,891. After the sale, the Partnership
received $106,965 in additional face value from the October pass-through
payment and will receive an additional $26,410 from the November
pass-through payment.
-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; uninsured
losses and potential conflicts of interest between the Partnership and its
Affiliates, including the General Partners.
Liquidity and Capital Resources
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.
On September 26, 2003, the borrower of the Wildflower Apartments PIM paid off
the Subordinated Promissory Note and the GNMA MBS. On September 26, 2003, the
Partnership received $546,000 of Shared Appreciation Interest and $234,000 of
Minimum Additional Interest. In addition, the Partnership received $250,310,
which represents a return of the interest rate rebate which had previously been
recorded as a reduction in basic interest. On October 15, 2003, the Partnership
received $15,328,844 from the GNMA MBS related to Wildflower. On October 29,
2003, the Partnership paid a special distribution of $1.07 per Limited Partner
interest from the proceeds received.
As a result of the payoff of the Wildflower PIM, the Partnership is in the
process of winding up its business, which it expects to complete in the fourth
quarter of 2003 with a Terminating Capital Transaction distribution to the
partners. In connection therewith, the Partnership has changed its basis of
accounting as of September 30, 2003 from the going-concern basis to the
liquidation basis of accounting.
At September 30, 2003, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $3.6 million as well as interest earned on the
Partnership's cash and cash equivalents. The Partnership anticipates that these
sources will be adequate to provide the Partnership with sufficient liquidity to
meet its obligations during its liquidation.
On October 15, 2003, the Partnership sold its remaining MBS portfolio for
$1,897,129, including accrued interest of $5,525. The gain realized from the
sale was $145,233.
The proceeds from the sale of the MBS will be included with other amounts
available for distribution from the Terminating Capital Transaction and will be
distributed to the Limited Partners prior to year-end 2003 in a final
liquidating distribution.
The Partnership is in the process of winding up its business and expects to make
a Terminating Capital Transaction distribution, as defined in the Partnership
Agreement, to the partners in the fourth quarter of 2003. Upon the occurrence of
a Terminating Capital Transaction, the Partnership Agreement provides that
losses from the Terminating Capital Transaction shall be allocated first to the
Limited Partners and General Partners to the extent of any then existing
positive account balances (or if the amount would be insufficient to reduce
those positive capital account balances to zero, then in proportion to any
positive account balances). The Advisor has estimated that the loss from the
Terminating Capital Transaction will be approximately $287,000. As of December
31, 2002, the General Partners had deficit account balances of approximately
$459,000 and the Limited Partners had positive account balances of approximately
$32,168,000. Therefore, all estimated losses from the Terminating Capital
Transaction will be allocated, for tax purposes, to the Limited Partners to
reduce their positive capital accounts. Amounts available for distribution from
the Terminating Capital Transaction will be distributed to the Limited Partners.
Upon the dissolution and termination of the Partnership, the General Partners
will contribute to the Partnership an amount equal to the remaining deficit
balance in their capital accounts. The General Partners have estimated that the
deficit balance will be approximately $459,000 which, after satisfaction of any
other obligations of the Partnership, will also be distributed to the Limited
Partners.
-8-
Critical Accounting Policy
The Partnership's critical accounting policy relates to the Partnership's
estimates included in its liquidation basis accounting statements. The
Partnership's policy is as follows:
The Partnership is in the process of winding up its business, which it expects
to complete in the fourth quarter of 2003. In connection therewith, the
Partnership has changed its basis of accounting as of September 30, 2003 from
the going-concern basis to the liquidation basis of accounting. The liquidation
basis of accounting requires that assets and liabilities be stated at their
estimated net realizable value and that estimated costs of liquidating the
Partnership be provided to the extent that they are reasonably determinable. The
Partnership estimates that the costs to liquidate will be approximately
$282,518, which primarily relates to the remaining general and administrative
expenses to be incurred through the anticipated liquidation of the Partnership
in December 2003. This amount has been included in the Partnership's liabilities
at September 30, 2003.
Results of Operations
Net income increased in the three months ended September 30, 2003 as compared to
September 30, 2002 primarily due to increases in basic interest on PIMs and
participation interest. This increase was partially offset by decreases in MBS
interest income and other interest income and the recording of the estimated
liquidation costs of the Partnership. Basic interest on PIMs increased primarily
due to the return of the Wildflower Apartments PIM interest rate rebate. This
increase was partially offset by the Creekside PIM payoff in June 2003.
Participation interest increased due to the participation interest collected
from the Wildflower Apartments PIM payoff in September 2003. MBS interest income
decreased primarily due to on-going single-family MBS principal collections.
Other interest income decreased due to significantly lower average cash balances
available for short-term investing and lower interest rates earned on those
balances in the three-month period ended September 30, 2003 versus the same
period last year. The recording of estimated liquidation costs is due to the
Partnership changing its basis of accounting from the going-concern basis to the
liquidation basis. Due to this change, the Partnership recorded an estimate in
the third quarter of the remaining general and administrative expenses to be
incurred through the anticipated liquidation in December 2003.
Net income increased in the nine months ended September 30, 2003 as compared to
September 30, 2002 primarily due to increases in basic interest on PIMs and
participation interest and decreases in asset management fees and amortization
expense. The increase was partially offset by decreases in MBS interest income
and other interest income and an increase in expense reimbursements to
affiliates. The increase was also partially offset by the recording of the
estimated liquidation costs of the Partnership. Basic interest on PIMs increased
primarily due to the return of the Wildflower Apartments PIM interest rate
rebate. This increase was partially offset by the Creekside PIM payoff in June
2003. Participation interest increased due to the participation interest
collected from the Wildflower Apartments PIM payoff in September 2003. 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. MBS interest income decreased primarily due to the
Richmond Park payoff in June 2002 and on-going single-family MBS principal
collections. The decrease in other interest income was due to significantly
lower average cash balances available for short-term investing and lower
interest rates earned on those balances in the nine-month period ended September
30, 2003 versus the same period last year. The increase in expense
reimbursements to affiliates is primarily due to a change in the estimated cost
of services provided to the Partnership in 2002. The recording of estimated
liquidation costs is due to the Partnership changing its basis of accounting
from the going-concern basis to the liquidation basis. Due to this change, the
Partnership recorded an estimate in the third quarter of the remaining general
and administrative expenses to be incurred through the anticipated liquidation
in December 2003.
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.
-9-
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 $3.4 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.
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.
(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 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
-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 Mortgage Limited Partnership
(Registrant)
BY: /s/ Alan Reese
-----------------------------------------
Alan Reese
Treasurer and Chief Accounting Officer of
Krupp Plus Corporation, a General Partner
DATE: October 30, 2003
-12-