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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, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17691
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Krupp Insured Plus-III Limited Partnership
Massachusetts 04-3007489
(State or other jurisdiction of incorporation or organization) (IRS employer 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)
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. 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;
prepayments 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, 2001, 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.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
------------------ ------------------
Participating Insured Mortgages ("PIMs")(Note 2) $ 12,947,374 $ 27,762,795
Mortgage-Backed Securities and insured
mortgage ("MBS")(Note 3) 10,865,520 11,407,452
------------------ ------------------
Total mortgage investments 23,812,894 39,170,247
Cash and cash equivalents 1,703,750 1,900,744
Interest receivable and other assets 163,702 275,094
Prepaid acquisition fees and expenses, net of
accumulated amortization of $991,739 and
$955,545, respectively - 36,194
Prepaid participation servicing fees, net of
accumulated amortization of $311,204 and
$293,743, respectively 17,460 34,921
------------------ ------------------
Total assets $ 25,697,806 $ 41,417,200
================== ==================
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 69,895 $ 17,877
------------------ ------------------
Partners' equity (deficit) (Note 4):
Limited Partners
(12,770,261 Limited Partner interests outstanding) 25,680,840 41,486,071
General Partners (199,481) (217,863)
Accumulated comprehensive income 146,552 131,115
------------------ ------------------
Total Partners' equity 25,627,911 41,399,323
------------------ ------------------
Total liabilities and Partners' equity $ 25,697,806 $ 41,417,200
================== ==================
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
------------- ------------ -------------- ---------------
Revenues:
Interest income - PIMs:
Basic interest $ 259,121 $ 659,966 $ 621,798 $ 1,371,638
Participation Interest - 25,000 1,339,172 25,000
Interest income - MBS 203,107 225,173 411,342 457,859
Other interest income 9,665 30,340 41,972 58,898
------------- ------------ -------------- --------------
Total revenues 471,893 940,479 2,414,284 1,913,395
------------- ------------ -------------- --------------
Expenses:
Asset management fee to an affiliate 44,406 82,829 98,284 169,471
Expense reimbursements to affiliates 26,817 24,987 46,081 46,345
Amortization of prepaid fees and expenses 23,208 52,072 53,655 135,635
General and administrative 59,592 33,935 79,157 51,734
------------- ------------ -------------- --------------
Total expenses 154,023 193,823 277,177 403,185
------------- ------------ -------------- --------------
Net income 317,870 746,656 2,137,107 1,510,210
Other comprehensive income:
Net change in unrealized gain (loss)
on MBS 17,550 (8,061) 15,437 (2,445)
------------- ------------ -------------- --------------
Total comprehensive income $ 335,420 $ 738,595 $ 2,152,544 $ 1,507,765
============= ============ ============== ==============
Allocation of net income (Note 4):
Limited Partners $ 308,334 $ 724,257 $ 2,072,994 $ 1,464,904
============= ============ ============== ==============
Average net income per Limited
Partner interest (12,770,261
Limited Partner interests
outstanding) $ .02 $ .05 $ .16 $ .11
============= ============ ============== ==============
General Partners $ 9,536 $ 22,399 $ 64,113 $ 45,306
============= ============ ============== ==============
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
----------------------------------------
2002 2001
--------------- --------------
Operating activities:
Net income $ 2,137,107 $ 1,510,210
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid fees and expenses 53,655 135,635
Shared Appreciation Interest (1,004,379) (15,000)
Changes in assets and liabilities:
Decrease in interest receivable and other assets 111,392 41,448
Increase in liabilities 52,018 13,495
--------------- --------------
Net cash provided by operating activities 1,349,793 1,685,788
--------------- --------------
Investing activities:
Principal collections on PIMs including Shared Appreciation
Interest of $1,004,379 in 2002 and $15,000 in 2001 15,819,800 6,811,137
Principal collections on MBS 557,369 530,310
--------------- --------------
Net cash provided by investing activities 16,377,169 7,341,447
--------------- --------------
Financing activities:
Quarterly distributions (2,088,956) (2,095,378)
Special distribution (15,835,000) -
--------------- --------------
Net cash used for financing activities (17,923,956) (2,095,378)
--------------- --------------
Net increase (decrease) in cash and cash equivalents (196,994) 6,931,857
Cash and cash equivalents, beginning of period 1,900,744 1,910,212
--------------- --------------
Cash and cash equivalents, end of period $ 1,703,750 $ 8,842,069
=============== ==============
Non cash activities:
Increase (decrease) in Fair Value of MBS $ 15,437 $ (2,445)
=============== ==============
The accompanying notes are an integral part
of the financial statements.
KRUPP INSURED PLUS-III 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, Krupp Plus Corporation and Mortgage
Services Partners Limited Partnership, (collectively the "General
Partners") of Krupp Insured Plus-III 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, 2001 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, 2002, its
results of operations for the three and six months ended June 30, 2002
and 2001 and its cash flows for the six months ended June 30, 2002 and
2001.
The results of operations for the three and six months ended June 30,
2002 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 June 30, 2002, the Partnership's remaining PIM had a fair market
value of approximately $13,744,414 and gross unrealized gains of
approximately $797,040. The PIM matures in 2031.
The Partnership received a prepayment of the Royal Palm Place PIM. On
January 2, 2002, the Partnership received $1,004,379 of Shared
Appreciation Interest and $334,793 of Minimum Additional Interest. On
February 25, 2002, the Partnership received $14,764,062 representing
the principal proceeds on the first mortgage. On March 19, 2002, the
Partnership paid a special distribution of $1.24 per Limited Partner
interest from the principal proceeds and Shared Appreciation Interest
received.
3. MBS
At June 30, 2002, the Partnership's MBS portfolio had an amortized cost
of $2,812,886 and gross unrealized gains of $146,552. At June 30, 2002,
the Partnership's insured mortgage loan had an amortized cost of
$7,906,082 and a gross unrealized gain of $330,474. The portfolio has
maturities ranging from 2016 to 2035.
The accompanying notes are an integral
part of the financial statements.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended
June 30, 2002 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------- ---------- ------------ --------------
Balance at December 31, 2001 $ 41,486,071 $ (217,863) $ 131,115 $ 41,399,323
Net income 2,072,994 64,113 - 2,137,107
Special Distribution (15,835,000) - - (15,835,000)
Quarterly distributions (2,043,225) (45,731) - (2,088,956)
Change in unrealized gain on MBS - - 15,437 15,437
------------- ----------- ----------- --------------
Balance at June 30, 2002 $ 25,680,840 $ (199,481) $ 146,552 $ 25,627,911
============= =========== ============ ==============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this 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 June 30, 2002, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $1.7 million as well as the cash flow provided by
its investments in the 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
distributions paid to investors, which are approximately $1.0 million. Funds for
the quarterly distributions come from the monthly principal and basic interest
payments received on the remaining PIM and MBS, the principal prepayments of MBS
and interest earned on the Partnership's cash and cash equivalents. 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 also will 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 can maintain its current
distribution rate of $0.08 per Limited Partner interest per quarter through the
November distribution.
The Partnership received a prepayment of the Royal Palm Place PIM. On January 2,
2002, the Partnership received $1,004,379 of Shared Appreciation Interest and
$334,793 of Minimum Additional Interest. On February 25, 2002, the Partnership
received $14,764,062 representing the principal proceeds on the first mortgage.
On March 19, 2002, the Partnership paid a special distribution of $1.24 per
Limited Partner interest from the principal proceeds and Shared Appreciation
Interest received.
In addition to providing insured or guaranteed monthly principal and basic
interest payments, the Partnership's remaining PIM investment 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 participation is neither
guaranteed nor insured, and it 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 Harbor Club. Presently, the General Partners do not expect Harbor Club
to pay the Partnership any participation interest or to be sold or refinanced
during 2002. 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. Harbor Club
operates successfully in Ann Arbor, Michigan, which is a very competitive market
with many newer apartment properties. Although Harbor Club has maintained
occupancy rates in the mid 90% range for the past two years, most cash flow
generated by the property is used for capital replacements and improvements that
help it maintain its strong market position.
The Partnership has the option to call its remaining PIM by accelerating the
maturity of the loan. 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, the interest rate environment and
availability of financing will affect this decision.
Critical Accounting Policy
The Partnership's critical accounting policy relates primarily to revenue
recognition related to the participation feature of the Partnership's PIM
investments. The Partnership's policy is as follows:
Basic interest on PIMs is recognized based on the stated coupon rate of the GNMA
MBS. The Partnership recognizes interest related to the participation features
when the amount becomes fixed and the transaction that gives rise to such amount
is consummated.
Results of Operations
Net income decreased for the three months ending June 30, 2002 as compared to
the same period ending June 30, 2001. This decrease is due primarily to
decreases in basic interest income on PIMs, interest income on MBS, other
interest income and participation income and an increase in general and
administrative expenses net of decreases in asset management fees and
amortization expense. Basic interest income on PIMs decreased due to the payoff
of the Royal Palm Place PIM in the first quarter of 2002 and the payoff of the
Casa Marina PIM in June of 2001. Interest income on MBS decreased due to lower
principal balances. Other interest income decreased due to lower average cash
balances available for short-term investing and lower interest rates earned on
those balances in the three-month period when compared to the same period in
2001. Participation income was greater in 2001 due to the payoff of the Casa
Marina PIM mentioned above. Asset management fees decreased due to the decline
in the Partnership's asset base as a result of principal collections and
prepayments. Amortization expense decreased due to the full recognition of
prepaid fees and expenses associated with the Royal Palm Place PIM in April of
2001. General and administrative expense was higher in 2002 when compared to
2001 due to the overpayment of 2000 processing costs that were refunded in 2001.
Net income increased for the six months ended June 30, 2002 as compared to the
same period ending June 30, 2001 due primarily to an increase in participation
income and decreases in asset management fees and amortization expense. This was
partially offset by a decrease in basic interest income on PIMs and an increase
in general and administrative expense. Participation income increased due to the
payoff of the Royal Palm Place PIM in the first quarter of 2002. Asset
management fees decreased due to the decline in the Partnership's asset base as
a result of principal collections and prepayments. Amortization expense
decreased due to the full recognition of prepaid fees and expenses associated
with the Royal Palm Place PIM in April of 2001. Basic interest income on PIMs
decreased due to the payoff of the Royal Palm Place PIM mentioned above and the
Casa Marina PIM in July of 2001. General and administrative expense was higher
in 2002 when compared to 2001 due to the overpayment of 2000 processing costs
that were refunded in 2001
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by the
Government National Mortgage Association ("GNMA"), Fannie Mae, the Federal Home
Loan Mortgage Corporation ("FHLMC") or the 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. 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. These obligations
are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board.
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, 2002, the Partnership includes in cash and cash equivalents
approximately $1.4 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.
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, 2002, 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. 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 its remaining PIM, the Partnership continues to monitor the
borrower for any indication of a prepayment.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in 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
(99.1)Principal Executive Officer Certification
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99.2)Chief Accounting Officer Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
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 Plus-III 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 13, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Insured Plus III Limited
Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Douglas Krupp, Co-Chariman (Principal Executive Officer),
President and Director of Krupp Plus Corporation, a General Partner of the
Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership as of June 30, 2002 (the last
date of the period covered by the Report).
/ s / Douglas Krupp
- --------------------------------
Douglas Krupp,
Principal Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Insured Plus III Limited
Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert A. Barrows, Chief Accounting Officer of Krupp Plus
Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership as of June 30, 2002 (the last
date of the period covered by the Report).
/ s / Robert A. Barrows
- -----------------------------
Robert A. Barrows,
Chief Accounting Officer