10-Q 1 d57513_10-q.txt FORM 10-Q -------------------------- OMB APPROVAL -------------------------- OMB Number: 3235-0070 Expires: March 31, 2006 Estimated average burden hours per response: 192.00 -------------------------- 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

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) --------------------

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) --------------------

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:

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-

KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP 10-Q