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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 March 31, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-15815
Krupp Insured Plus Limited Partnership
(Exact name of registrant as specified in its charter)
Massachusetts 04-2915281
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
SEC 1296 (01-04) Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
-1-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
pre-payments of mortgages; failure of borrowers to pay participation interests
due to poor operating results of properties underlying the mortgages; uninsured
losses and potential conflicts of interest between the Partnership and its
Affiliates, including the General Partners. The Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 2003, contain additional information concerning such
risk factors. Actual results in the future could differ materially from those
described in any forward-looking statements as a result of the risk factors set
forth above, and the risk factors described in the Annual Report.
-2-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
March 31, December 31,
2004 2003
------------ ------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 12,972,393 $ 13,001,521
Mortgage-Backed Securities ("MBS") (Note 3) 585,604 598,579
------------ ------------
Total mortgage investments 13,557,997 13,600,100
Cash and cash equivalents 829,619 869,608
Interest receivable and other assets 85,223 85,556
------------ ------------
Total assets $ 14,472,839 $ 14,555,264
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 37,469 $ 70,194
------------ ------------
Partners' equity (deficit)(Note 4):
Limited Partners
(7,500,099 Limited Partner interests outstanding) 14,638,378 14,700,952
General Partners (250,177) (250,667)
Accumulated comprehensive income 47,169 34,785
------------ ------------
Total Partners' equity 14,435,370 14,485,070
------------ ------------
Total liabilities and Partners' equity $ 14,472,839 $ 14,555,264
============ ============
The accompanying notes are an integral
part of the financial statements.
-3-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months
Ended March 31,
----------------------
2004 2003
--------- ---------
Revenues:
Interest income - PIMs
Basic interest $ 239,358 $ 241,435
Interest income - MBS 11,834 105,820
Other interest income 2,293 11,709
--------- ---------
Total revenues 253,485 358,964
--------- ---------
Expenses:
Asset management fee to an affiliate 25,214 37,403
Expense reimbursements to affiliates 40,238 32,662
General and administrative 20,580 32,254
--------- ---------
Total expenses 86,032 102,319
--------- ---------
Net income 167,453 256,645
Other comprehensive income:
Net increase (decrease) in unrealized gain on MBS 12,384 (61,492)
--------- ---------
Total comprehensive income $ 179,837 $ 195,153
========= =========
Allocation of net income (Note 4):
Limited Partners $ 162,429 $ 248,946
========= =========
Average net income per Limited Partner
interest (7,500,099 Limited Partner interests outstanding) $ .02 $ .03
========= =========
General Partners $ 5,024 $ 7,699
========= =========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
---------------------------
2004 2003
----------- -----------
Operating activities:
Net income $ 167,453 $ 256,645
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization -- 42,475
Changes in assets and liabilities:
Decrease in interest receivable and other assets 333 13,625
Decrease in liabilities (32,725) (11,790)
----------- -----------
Net cash provided by operating activities 135,061 300,955
----------- -----------
Investing activities:
Principal collections on MBS 25,359 2,025,573
Principal collections on PIMs 29,128 27,030
----------- -----------
Net cash provided by investing activities 54,487 2,052,603
----------- -----------
Financing activity:
Quarterly distributions (229,537) (387,667)
----------- -----------
Net increase (decrease) in cash and cash equivalents (39,989) 1,965,891
Cash and cash equivalents, beginning of period 869,608 573,389
----------- -----------
Cash and cash equivalents, end of period $ 829,619 $ 2,539,280
=========== ===========
Non cash activities:
Increase (decrease) in unrealized gain on MBS $ 12,384 $ (61,492)
=========== ===========
The accompanying notes are an integral
part of the financial statements.
-5-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted in this report on Form 10-Q pursuant to the Rules and Regulations
of the Securities and Exchange Commission. However, in the opinion of the
general partners, The Krupp Corporation and The Krupp Company Limited
Partnership-IV (collectively the "General Partners"), of Krupp Insured
Plus Limited Partnership (the "Partnership"), the disclosures contained in
this report are adequate to make the information presented not misleading.
See Notes to Financial Statements included in the Partnership's Form 10-K
for the year ended December 31, 2003 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, 2004, its results of
operations for the three months ended March 31, 2004 and 2003 and its cash
flows for the three months ended March 31, 2004 and 2003.
The results of operations for the three months ended March 31, 2004 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, 2004, the FHA insured mortgage portion of the Partnership's
remaining PIM had a fair value of $12,972,393. Fair value assumes that the
FHA insured first mortgage could be sold at a price that MBS with similar
interest rates are currently being sold at. Fair value does not include
any value for the PIM's participation feature. The PIM matures in 2033 and
at March 31, 2004 was not delinquent as to principal or interest.
3. MBS
At March 31, 2004, the Partnership's MBS portfolio had an amortized cost
of $538,435 and gross unrealized gains of $47,169. The portfolio has
maturities ranging from 2007 to 2019.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the three months ended March
31, 2004 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------ ------------ ------------- ------------
Balance at December 31, 2003 $ 14,700,952 $ (250,667) $ 34,785 $ 14,485,070
Net income 162,429 5,024 -- 167,453
Quarterly distributions (225,003) (4,534) -- (229,537)
Change in unrealized gain on MBS -- -- 12,834 12,384
------------ ------------ ------------ ------------
Balance at March 31, 2004 $ 14,638,378 $ (250,177) $ 47,169 $ 14,435,370
============ ============ ============ ============
-6-
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 2003
Annual Report on Form 10-K and in this report on Form 10-Q.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report on Form 10-Q
constitute "forward-looking statements" within the meaning of the Federal
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Partnership's actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among other things, federal, state or local regulations; adverse changes in
general economic or local conditions; pre-payments of mortgages; failure of
borrowers to pay participation interests due to poor operating results at
properties underlying the mortgages; uninsured losses and potential conflicts of
interest between the Partnership and its Affiliates, including the General
Partners.
Liquidity and Capital Resources
At March 31, 2004, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $800,000 as well as the cash flow provided by its
investments in its remaining PIM and MBS. The Partnership anticipates that these
sources will be adequate to provide the Partnership with sufficient liquidity to
meet its obligations as well as to provide distributions to its investors.
The most significant demand on the Partnership's liquidity is the quarterly
distribution paid to investors of approximately $225,000, which represents the
current quarterly distribution rate of $0.03 per Limited Partner interest. Funds
for the quarterly distributions come from interest income received on the
remaining PIM and MBS and cash and cash equivalents, net of operating expenses,
and the principal collections received on the remaining PIM and MBS. The portion
of distributions attributable to the principal collections and cash reserves
reduces the capital resources of the Partnership. As the capital resources
decrease, the total cash flows to the Partnership will also decrease and over
time will result in periodic adjustments to the distributions paid to investors.
The General Partners periodically review the distribution rate to determine
whether an adjustment is necessary based on projected future cash flows. In
general, the General Partners try to set a distribution rate that provides for
level quarterly distributions. To the extent that quarterly distributions do not
fully utilize the cash available for distributions and cash balances increase,
the General Partners may adjust the distribution rate or distribute such funds
through a special distribution. Based on current projections, the General
Partners have determined that the Partnership will continue to pay a
distribution rate of $0.03 per Limited Partner interest per quarter for the near
future.
In addition to providing insured monthly principal and basic interest payments
from the insured first mortgage portion of the PIM, the Partnership's investment
in the remaining PIM also may provide additional income through a participation
interest in the underlying property. The Partnership may receive a share in any
operating cash flow that exceeds debt service obligations and capital needs or a
share in any appreciation in value when the property is sold or refinanced.
However, this payment is not insured and is dependent upon whether property
operations or its terminal value meet certain criteria.
The Partnership's only remaining PIM investment is backed by the first mortgage
loan on Vista Montana. Due to the declining economic conditions currently
affecting the Phoenix, Arizona sub-market, the occupancy rate at the property is
currently 88% which is average for the sub-market. The owner has lowered rents
and is offering move-in concessions in an effort to increase occupancy.
Presently, the General Partners do not expect Vista Montana to pay the
Partnership any participation interest during 2004. The borrower has indicated
that they are considering refinancing the property in 2004. There are no
contractual obligations remaining that would prevent a prepayment of the
underlying first mortgage.
In the event that the Vista Montana PIM is paid off, the Partnership would then
commence an orderly liquidation of the remaining assets of the Partnership and
subsequently pay a liquidation distribution.
In the event that the remaining PIM does not payoff as discussed above, the
Partnership does have the option to call this PIM by accelerating the maturity.
If the call feature is exercised for the whole PIM then the insurance feature of
the loan would be canceled. Therefore, the Partnership will determine the merits
of exercising the call option as economic conditions warrant. Such factors as
the condition of the asset, local market conditions, interest rates and
available financing will have an impact on this decision.
-7-
Critical Accounting Policies
The Partnership's critical accounting policies relate primarily to revenue
recognition related to the Partnership's remaining PIM investment and the
carrying value of the MBS. The Partnership's policies are as follows:
The Partnership holds the insured mortgage portion of its Federal Housing
Administration PIM (FHA PIM) at amortized cost and does not establish loan loss
reserves as this investment is fully insured by the FHA. Basic interest on PIMs
is recognized at the stated rate of its Federal Housing Administration insured
mortgage (less the servicer's fee). The Partnership recognizes interest related
to the participation features when the amount becomes fixed and the transaction
that gives rise to such amount is finalized, cash is received and all
contingencies are resolved. This could be the sale or refinancing of the
underlying real estate, which results in a cash payment to the Partnership or a
cash payment made to the Partnership from surplus cash relative to the
participation feature.
The Partnership accounts for its MBS portfolio in accordance with Financial
Accounting Standards Board's Statement 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"), under the classification of
available-for-sale. The Partnership classifies its MBS portfolio as
available-for-sale as a portion of the MBS portfolio may remain after all of the
PIMs pay off. 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.
Results of Operations
Net income of the Partnership decreased for the first quarter of 2004 as
compared to the same period in 2003 due primarily to decreases in interest
income on MBS, other interest income and an increase in expense reimbursement to
affiliates. This is partially offset by decreases in asset management fees and
general and administrative expense. Interest income on MBS decreased due to the
payoffs of the Mission Terrace Apartments MBS in February of 2003 and the Briar
Ridge Apartments MBS in June of 2003. Other interest income decreased primarily
due to interest received in the first quarter of 2003 from the Partnership's
distribution account. Expense reimbursement to affiliates increased due to an
increase in the cost of services associated with the wind-down of the
Partnership's activities and anticipated liquidation of the Partnership's assets
due to the expected refinancing of the Vista Montana PIM . Asset management fees
decreased due to the decline in the Partnership's asset base as a result of
principal collections and prepayments. General and administrative expense was
greater in the first quarter of 2003 primarily due to additional printing costs
relating to the SEC filing and legal costs associated with the Berkshire Income
Realty, Inc exchange offer.
Off Balance Sheet Arrangements
The Partnership has no off balance sheet arrangements as described in Item
303(a)(4)(ii) of Regulation S-K and did not have any such arrangements during
the period covered by this report on Form 10-Q.
Contractual Obligations
The Partnership has no contractual obligations as contemplated by Item 303(a)(5)
of Regulation S-K and did not have any such arrangements either during the
period covered by this report on Form 10-Q or during the Partnership's most
recent completed fiscal year.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Partnership's investments in its insured mortgage portion of its PIM and its
MBS are guaranteed and/or insured by the Government National Mortgage
Association ("GNMA"), Fannie Mae, the Federal Home Loan Mortgage Corporation
("FHLMC") or the United States Department of Housing and Urban Development
("HUD") and therefore the certainty of their cash flows and the risk of material
loss of the amounts invested depends on the creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States and both have significant experience in mortgage
securitizations. In addition, their MBS carry
-8-
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 March 31, 2004, the Partnership includes in cash and cash equivalents
approximately $600,000 of commercial paper, which is issued by entities with a
credit rating equal to one of the top two rating categories of a nationally
recognized statistical rating organization.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk, which
can be defined as the exposure of the Partnership's net income, comprehensive
income or financial condition to adverse movements in interest rates. At March
31, 2004, 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. It is expected that
substantially all of the MBS will prepay over the same time period, mitigating
any potential interest rate risk to the disposition value of any remaining MBS.
The Partnership monitors prepayments and considers prepayment trends, as well as
distribution requirements of the Partnership, when setting regular distribution
policy. For MBS, the fund forecasts prepayments based on trends in similar
securities as reported by statistical reporting entities such as Bloomberg. For
its remaining PIM, the Partnership incorporates prepayment assumptions into
planning as the property notifies the Partnership of the intent to prepay or as
it matures.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2004, the Senior Vice President and Chief Accounting Officer of
The Krupp Corporation, a general partner of the Partnership, carried out an
evaluation of the effectiveness of the design and operation of the Partnership's
disclosure controls and procedures. 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.
-9-
KRUPP INSURED PLUS LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities
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
-10-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Krupp Insured Plus Limited Partnership
(Registrant)
BY: /s/ Alan Reese
-----------------------------
Alan Reese
Vice-President (Chief Accounting Officer) of
The Krupp Corporation, a General Partner of
the Registrant.
DATE: May 5, 2004
-11-