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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-17691
Krupp Insured Plus-III Limited Partnership
(Exact name of registrant as specified in its charter)
Massachusetts 04-3007489
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 523-0066
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Depositary
Receipts representing
Units of Limited
Partner Interests
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Aggregate market value of voting securities held by non-affiliates: Not
applicable.
Documents incorporated by reference: see Part IV, Item 14
The exhibit index is located on pages 9-12.
-13-
PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein.
ITEM 1. BUSINESS
Krupp Insured Plus-III Limited Partnership (the "Partnership") is a
Massachusetts limited partnership which was formed on March 21, 1988. The
Partnership raised approximately $255 million through a public offering of
limited partner interests evidenced by units of depositary receipts ("Units")
and used the net proceeds primarily to acquire participating insured mortgages
("PIMs") and mortgage-backed securities ("MBS"). The Partnership considers
itself to be engaged in only one industry segment, investment in mortgages.
The Partnership's investments in PIMs on multi-family residential properties
consist of a MBS (the "insured mortgage") guaranteed as to principal and basic
interest and a participation feature that is not insured nor guaranteed. The
insured mortgages were issued or originated under or in connection with the
housing programs of the Government National Mortgage Association ("GNMA") or
Federal National Mortgage Association ("Fannie Mae"). PIMs provide the
Partnership with monthly payments of principal and interest on the insured
mortgage and also provide for Partnership participation in the current revenue
stream and in residual value, if any, as a result of a sale or other realization
of the underlying property from the participation feature. The borrower conveys
the participation rights to the Partnership through a subordinated promissory
note and mortgage.
The Partnership also acquired MBS collateralized by single-family or
multi-family mortgage loans issued or originated by GNMA, Fannie Mae, the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal Housing
Administration ("FHA"). Fannie Mae, FHLMC and GNMA guarantee the principal and
basic interest of the Fannie Mae, FHLMC and GNMA MBS, respectively. The
Department of Housing and Urban Development ("HUD") insures the FHA mortgage
loan and the mortgage loans underlying the GNMA MBS.
The Partnership must distribute proceeds received from prepayments or other
realization of the mortgages to the investors through quarterly or possibly
special distributions.
Although the Partnership will terminate no later than December 31, 2028 it is
expected that the value of the PIMs generally will be realized by the
Partnership through repayment or sale as early as ten years from the dates of
the closings of the permanent loans and that the Partnership may realize the
value of all of its other investments within that time frame thereby resulting
in a dissolution of the Partnership significantly prior to December 31, 2028.
The Partnership's investments are not expected to be subject to seasonal
fluctuations. However, the future performance of the Partnership will depend
upon certain factors which can not be predicted. Such factors include interest
rate fluctuations and the credit worthiness of GNMA, Fannie Mae, HUD and FHLMC.
Any ultimate realization of the participation features on PIMs is subject to
similar risks associated with equity real estate investments, including:
reliance on the owner's operating skills, ability to maintain occupancy levels,
control operating expenses, maintain the property and obtain adequate insurance
coverage; adverse changes in government regulations, real estate zoning laws, or
tax laws; and other circumstances over which the Partnership may have little or
no control.
The requirements for compliance with federal, state and local regulations to
date have not had an adverse effect on the Partnership's operations, and no
adverse effect therefrom is now anticipated in the future.
As of December 31, 1998, there were no personnel directly employed by the
Partnership.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Partnership is a
party or to which any of its investments is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There currently is no established trading market for the Units.
The number of investors holding Units as of December 31, 1998 was
approximately 11,400. One of the objectives of the Partnership is to provide
quarterly distributions of cash flow generated by its investments in mortgages.
The Partnership anticipates that future operations will continue to generate
cash available for distributions.
During 1998, the Partnership made special distributions consisting primarily
of principal proceeds from the Woodbine, Ironwood, Sundance, Rosewood, Forth
Ward Square and Meredith Square PIM prepayments and the repayment of the
Brookside and Regency Park multi-family MBS.
During 1997, the Partnership made special distributions consisting primarily
of principal proceeds from the Paces Arbor and Paces Forest PIM prepayments and
the repayment of a multi-family MBS. The Partnership may make special
distributions in the future if PIMs prepay or a sufficient amount of cash is
available from MBS and PIM principal collections.
The Partnership made the following distributions, in quarterly installments,
and special distributions, to its Partners during the two years ended December
31, 1998 and 1997:
1998 1997
--------------------- -------------
Average Average
Amount Per Unit Amount Per Unit
Distributions
Limited Partners $11,110,042 $ .87 $ 15,324,194 $1.20
General Partners 310,551 373,032
----------- -----------
11,420,593 15,697,226
----------- -----------
Special Distributions
Limited Partners 73,811,533 $5.78 11,237,742 $ .88
----------- -----------
Total Distributions $85,232,126 $ 26,934,968
=========== ===========
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Partnership's financial position and operating results. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and Financial
Statement Schedule, which are included in Item 7 and Item 8, (Appendix A) of
this report, respectively.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total revenues $10,782,454 $18,896,423 $ 15,578,710 $ 15,728,883 $ 15,725,544
Net income 7,713,323 14,893,523 12,021,035 12,335,057 12,197,925
Net income allocated
to:
Limited Partners 7,481,923 14,446,717 11,660,404 11,965,005 11,831,987
Average per Unit .59 1.13 .91 .94 .93
General Partners 231,400 446,806 360,631 370,052 365,938
Total assets at
December 31 95,300,681 173,645,460 184,485,334 201,760,285 203,907,975
Distributions to:
Limited Partners 11,110,042 15,324,194 15,324,193 15,324,192 21,242,039
Average per Unit .87 1.20 1.20 1.20 1.66
Special 73,811,533 11,237,742 12,387,057 - -
Average per Unit 5.78 .88 .97 - -
General Partners 310,551 373,032 410,687 421,051 400,197
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
The General Partners of the Partnership have conducted an assessment of the
Partnership's core internal and external computer information systems and have
taken the further necessary steps to understand the nature and extent of the
work required to make its systems Year 2000 ready in those situations in which
it is required to do so. The Year 2000 readiness issue concerns the inability of
computerized information systems to accurately calculate, store or use a date
after 1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations.
In this regard, the General Partners of the Partnership, along with certain
affiliates, began a computer systems project in 1997 to significantly upgrade
its existing hardware and software. The General Partners completed the testing
and conversion of the financial accounting operating systems in February 1998.
As a result, the General Partners have generated operating efficiencies and
believe their financial accounting operating systems are Year 2000 ready. The
General Partners of the Partnership incurred hardware costs as well as
consulting and other expenses related to the infrastructure and facilities
enhancements necessary to complete the upgrade and prepare for the Year 2000.
There are no other significant internal systems or software that the Partnership
is using at the present time.
The General Partners of the Partnership are in the process of evaluating the
potential adverse impact that could result from the failure of material
third-party service providers (including but not limited to its banks and
telecommunications providers) and significant vendors to be Year 2000 ready. The
Trust is in the process of surveying these third party providers and assessing
their readiness with year 2000. To date, the Partnership is not aware of any
problems that would materially impact its results of operations, liquidity or
capital resources. However, the Partnership has not yet obtained all written
assurances that these providers would be Year 2000 ready.
The Partnership currently does not have a contingency plan in the event of a
particular provider or system not being Year 2000 ready. Such plan will be
developed if it becomes clear that a provider is not going to achieve its
scheduled readiness objectives by June 30, 1999. The inability of one of these
providers to complete its Year 2000 resolution process could impact the
Partnership. In addition, the Partnership is also subject to external forces
that might generally affect industry and commerce, such as utility and
transportation company Year 2000 readiness failures and related service
interruptions. To date, the Partnership has not incurred any cost associated
with being Year 2000 ready. All costs have been incurred by the General Partners
and it is estimated that any future Year 2000 readiness costs will be borne by
the General Partners. No estimate can be made at this time as to the impact of
the readiness of such third parties.
Liquidity and Capital Resources
The most significant demands on the Partnership's liquidity are the regular
quarterly distributions paid to investors, which are approximately $2.4 million
each quarter. Funds for the investor distributions come from the monthly
principal and basic interest payments received on the PIMs and MBS, the
principal prepayments of the PIMs and MBS, and interest earned on the
Partnership's cash and cash equivalents. In general, the General Partners try to
set a distribution rate that provides for level quarterly distributions of cash
available for distribution. 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. The portion of distributions attributable to the
principal collections 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. At this time the General Partners have determined that the
Partnership can maintain its current dividend rate of $.76 per Unit per year.
The Partnership made five special distributions during 1998 as a result
of the following PIM prepayments. In January 1998, a $2.30 per Unit
special distribution was made with the prepayment proceeds of the three Paddock
Club PIMs that were received during the fourth quarter 1997. In February 1998, a
$1.01 per Unit special distribution was made with the prepayment proceeds of
Fourth Ward Square and Meredith Square PIMs that were received during the fourth
quarter 1997. In April 1998, a $.42 per Unit special distribution was made with
the prepayment proceeds of the Rosewood PIM that was received during the first
quarter 1998. During July 1998, a $1.28 special distribution was made with the
prepayment proceeds of the Sundance PIM and the Regency and Brookside MBSs. In
December 1998, a $.77 per Unit special distribution was made with the prepayment
proceeds of the Ironwood and Woodbine PIMs. The Partnership anticipates making
an $.87 per Unit special distribution during the first quarter 1999 with the
prepayment proceeds of the Windsor Court PIM that were received in January 1999.
The General Partners expect that there will be more prepayments during 1999.
The owners of Marina Shores and Mill Ponds have both notified the General
Partners of their intention to refinance their properties if favorable
refinancing conditions persist. In the event of further PIM prepayments, the
General Partners may determine that an adjustment to the distribution rate will
be necessary to reflect the reduced future cash flows from the remaining
mortgage investments.
In addition to providing guaranteed monthly principal and basic interest
payments, the Partnership's PIM investments also may provide additional income
through its participation feature in the underlying properties if they operate
successfully. The Partnership may receive a share in any operating cash flow
that exceeds debt service obligations and capital needs or a share in any
appreciation in value when the properties are sold or refinanced. However, this
participation is neither guaranteed nor insured, and it is dependent upon
whether property operations or its terminal value met certain criteria. During
1998, the Partnership received a total of $831,786 in participation income from
operating cash flow from six of its PIM investments: Marina Shores, Mill Ponds,
Rosewood, Ironwood, Woodbine and Windsor Court. The Partnership also received a
total of $1,260,785 in participation income related to the sale or refinance
value from the Rosewood, Ironwood, Windsor Court and Woodbine PIM's and the
Brookside MBS.
Most of the properties had stable operating results during 1998. High occupancy
rates were maintained at most of the properties due to stable or improving
markets. However, as many of the properties have aged, rental rate increases
have not kept pace with the increasing costs of maintenance, repairs and
replacements.
During the first five years, owners are prohibited from prepaying the mortgage
loans underlying the PIMs. During the second five years, owners may prepay the
loans by incurring a prepayment penalty. The Partnership has the option to call
certain PIMs by accelerating their maturity if they are not prepaid by the tenth
year after permanent funding. The Partnership will determine the merits of
exercising the call option for each PIM as economic conditions warrant. Such
factors as the condition of the asset, local market conditions, the interest
rate environment and availability of financing will affect those decisions.
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by
Fannie Mae, FHLMC, GNMA or HUD and therefore the certainty of their cash flows
and the risk of material loss of the amounts invested depends on the
creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs and is
wholly-owned by the twelve Federal Home Loan Banks. These obligations are not
guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA
guarantees the full and timely payment of principal and basic interest on the
securities it issues, which represent interests in pooled mortgages insured by
HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by
the full faith and credit of the U.S.
Government.
Operations
The following discussion relates to the operation of the Partnership during
the years ended December 31, 1998, 1997 and 1996.
(Amounts in Thousands)
1998 1997 1996
---- ---- ----
Interest income on PIMs:
Basic interest $ 6,195 $10,066 $11,262
Participation interest 2,093 5,996 1,372
Interest income on MBS 1,695 2,390 2,706
Interest income - other 801 444 238
Partnership expenses (1,006) (1,549) (1,604)
Amortization of prepaid expenses
and fees (2,065) (2,453) (1,953)
------- -------- -------
Net income $ 7,713 $14,894 $12,021
======= ======= =======
Net income decreased during 1998 as compared to the same period in 1997 by
approximately $7,181,000. This decrease was due primarily to lower basic
interest on PIMs, lower participation interest and lower interest income on MBS
of $3,871,000, $3,903,000 and $695,000, respectively. This was partially offset
by increases in interest income-other and a decrease in partnership expenses and
amortization expenses. The significant decrease in basic interest on PIMs was
caused by the prepayments of the Sundance, Meredith Square, Fourth Ward Square,
Rosewood, Woodbine and Ironwood Apartment PIMs in 1998, and the three Paddock
and two Paces PIMs that occurred in 1997. The decrease in participation interest
was a result of the Partnership receiving a lower level of prepayment penalties
and shared interest income from PIM prepayments occuring during the twelve month
period ending December 31, 1998 as compared to the same period in 1997. The
decrease in MBS interest income was primarily due to the prepayment of the
Brookside and Regency Park MBS.
The increase in interest income other was due to the Partnership having higher
average short-term investment balances during the twelve months ended December
31, 1998 when compared to the corresponding period in 1997. The decrease in
partnership expenses was primarily due to lower asset management fees which were
a result of the reduction in the asset base occurring from the prepayments
mentioned above. Partnership expenses also decreased as expense reimbursements
to affiliates decreased due to the Partnership having received a rebate for
expense reimbursements related to 1997 in 1998. The decrease in amortization of
prepaid fees and expenses for 1998 as compared to the same period in 1997 was a
result of the Partnership fully amortizing the costs associated with the PIMs
that were prepaid in 1997 exceeding the Partnership fully amortizing the costs
associated with the PIMs that were prepaid in 1998.
Net income increased during 1997 as compared to 1996 by approximately
$2,873,000. This increase was primarily due to higher participation income, net
of lower basic interest on PIMs and interest income on MBS and higher
amortization expense directly related to the prepayments of the Paces Arbor,
Paces Forest, Paddock Club Jacksonville, Paddock Club Tallahassee and Paddock
Park II Apartment PIMs. An increase in Participation Interest of $4,624,000 was
primarily a result of receiving Shared Appreciation Income, Share Income
Interest, and prepayment penalties from the prepayments of the Paces Arbor
and Forest Apartments, the three Paddock Apartments, Fourth Ward Square
Apartments and Meredith Apartment PIMs totaling $5,784,000.In addition, the
Partnership received $212,000 of participation interest from five of the
remaining PIMs. Also, the Partnership received participation income from the
Fourth Ward Square and Meredith Square Apartments PIMs.
Interest income on MBS decreased when comparing 1997 to 1996, because principal
collections reduce the outstanding principal of the Partnership's MBS
investments. Interest income other increased when comparing 1997 to 1996,
primarily due to the Partnership=s higher short-term investment balances.
The Partnership expenses decreased when comparing 1997 to 1996, primarily due to
lower asset management fees.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. Information as to the
directors and executive officers of Krupp Plus Corporation which is a General
Partner of the Partnership and is the general partner of Mortgage Services
Partners Limited Partnership, which is the other General Partner of the
Partnership, is as follows:
Position with
Name and Age Krupp Plus Corporation
Douglas Krupp (52) President, Co-Chairman of
the Board and Director
George Krupp (54) Co-Chairman of the Board and Director
Peter F. Donovan (45) Senior Vice President
Ronald Halpern (57) Senior Vice President
Carol J. C. Mills (49) Vice President
Robert A. Barrows (41) Vice President and Treasurer
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive
Officer of The Berkshire Group, an integrated real estate financial services
firm engaged in real estate acquisition and property management, mortgage
banking and financial management. The Berkshire Group's interests include
ownership of a mortgage company specializing in commercial mortgage financing
with a portfolio of approximately $6.0 billion. In addition, The Berkshire Group
has a significant ownership interest in Berkshire Realty Company, Inc.
(NYSE-BRI), a real estate investment trust specializing in apartment
investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire
Group was established as The Krupp Companies in 1969 and he has served as the
Chief Executive Officer since 1992. Mr. Krupp serves as Chairman of the Board
and Director of Berkshire Realty Company, Inc. (NYSE-BRI) and he is also a
member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate
of Bryant College where he received an honorary Doctor of Science in Business
Administration in 1989 and was elected trustee in 1990. Mr. Krupp also serves as
Chairman of the Board and Trustee of Krupp Government Income Trust and Krupp
Government Income Trust II.
George Krupp is the Co-Founder and Co-Chairman of The Berkshire Group, an
integrated real estate financial services firm engaged in real estate
acquisition, mortgage banking, investment sponsorship, venture capital investing
and financial management. Mr. Krupp has held the position of Co-Chairman since
The Berkshire Group was established as The Krupp Companies in 1969. Mr. Krupp
has been an instructor of history at the New Jewish High School in Waltham,
Massachusetts since September of 1997. Mr. Krupp attended the University of
Pennsylvania and Harvard University and holds a Master's Degree in History from
Brown University.
Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance
which position he has held since January of 1998 and in this capacity, he
oversees the strategic growth plans of this mortgage banking firm. Berkshire
Mortgage Finance is the 16th largest in the United States based on servicing and
asset management of a $5.7 billion loan portfolio. Previously he served as
President of Berkshire Mortgage Finance from January of 1993 to January of 1998
and in that capacity he directed the production, underwriting, servicing and
asset management activities of the firm. Prior to that, he was Senior Vice
President of Berkshire Mortgage Finance and was responsible for all
participating mortgage originations. Before joining the firm in 1984, he was
Second Vice President, Real Estate Finance for Continental Illinois National
Bank & Trust, where he managed a $300 million construction loan portfolio of
commercial properties. Mr. Donovan received a B.A. from Trinity College and an
M.B.A. degree from Northwestern University.
Ronald Halpern (age 57) is President and COO of Berkshire Mortgage
Finance. He has served in these positions since January of 1998 and in this
capacity, he is responsible for the overall operations of the Company. Prior to
January of 1998, he was Executive Vice President, managing the underwriting,
closing, portfolio management and servicing departments for Berkshire Mortgage
Finance. Before joining the firm in 1987, he held senior management positions
with the Department of Housing and Urban Development in Washington D.C. and
several HUD regional offices. Mr. Halpern has over 30 years of experience in
real estate finance. He is currently a member of the Advisory Council for Fannie
Mae and Freddie Mac and was prior Chairman of the MBA Multifamily Housing
Committee. He holds a B.A. degree from the University of the City of New York
and J.D.
degree from Brooklyn Law School.
Robert A. Barrows is Senior Vice President and Chief Financial Officer of
Berkshire Mortgage Finance. Mr.Barrows has held several positions within
The Berkshire Group since joining the company in 1983 and is currently
responsible for accounting, financial reporting, treasury and management
information systems for Berkshire Mortgage Finance. Prior to joining The
Berkshire Group, he was an audit supervisor for Coopers & Lybrand L.L.P.in
Boston. He received a B.S. degree from Boston College and is a Certified Public
Accountant.
Carol J.C. Mills is Senior Vice President for Loan Management of
Berkshire Mortgage Finance and in this capacity, she is responsible for the Loan
Servicing and Asset Management functions of the Boston, Bethesda and Seattle
offices of Berkshire Mortgage Finance.She manages the estimated $6 billion
portfolio of loans. Ms. Mills joined Berkshire in December 1997 as Vice
President and was promoted to Senior Vice President in January 1999. From
January 1989 through November 1997, Ms. Mills was Vice President of First
Winthrop Corporation and Winthrop Financial Associates, in Cambridge, MA.
Ms. Mills earned a B.A. degree from Mount Holyoke College and a Master of
Architecture degree from Harvard University. Ms. Mills is a member of the
Real Estate Finance Association, New England Women in Real Estate and the
Mortgage Bankers Association.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1998, no person owned of record or was known by the
General Partners to own beneficially more than 5% of the Partnership's
12,770,161 outstanding Units. The only interests held by management or its
affiliates consist of its General Partner and Corporate Limited Partner
interests.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in Note F to the
Partnership's Financial Statements presented in Appendix A to this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements and
Schedule included under Item 8, Appendix A, on page F-2 of this
report.
2. Financial Statement Schedules - see Index to Financial Statements
and Schedule included under Item 8, Appendix A, on page F-2 of
this report. All other schedules are omitted as they are not
applicable, not required or the information is provided in the
Financial Statements or the Notes thereto.
(b) Exhibits:
Number and Description
Under Regulation S-K
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K:
(4) Instruments defining the rights of security holders including indentures:
(4.1) Agreement of Limited Partnership dated as of June 22, 1988
[Exhibit A included in Amendment No. 1 of Registrant's
Registration Statement on Form S-11 dated June 22, 1988
(File No.
33-21200)].*
(4.2) Subscription Agreement whereby a subscriber agrees to
purchase Units and adopts the provisions of the Agreement
of Limited Partnership [Exhibit D included in Amendment No.
1 of Registrant's Registration Statement on Form S-11 dated
June 22, 1988 (File No. 33-21200)].*
(4.3) Copy of First Amended and Restated Certificate of
Limited Partnership filed with the Massachusetts
Secretary of State on June 22, 1988. [Exhibit 4.4 to
Amendment No. 1 of Registrant's Registration Statement on
Form S-11 dated June 22, 1988 (File No. 33-21200)].*
(10) Material Contracts:
(10.1) Revised form of Escrow Agreement [Exhibit 10.1 to
Amendment No. 1 of Registrant's Registration Statement on
Form S-11 dated June 22, 1988 (File No. 33-21200)] *
(10.2) Form of agreement between the Partnership and Krupp
Mortgage Corporation [Exhibit 10.2 to Registrant's
Registration Statement on Form S-11 dated April 20, 1988
(File No. 33-21200)].*
Casa Marina Apartments
(10.3) Prospectus for GNMA Pool No. 279699 (CS) and 279700 (PL)
[Exhibit 19.11 to Registrant's Report on Form 10-Q for
the quarter ended September 30, 1989 (File No. 0-17691)].*
(10.4) Subordinated Multifamily Mortgage (including Subordinated
Promissory Note) dated June 29, 1989 between Beaux Gardens
Associates, LTD., a Florida limited partnership and Krupp
Insured Plus-II Limited Partnership. [Exhibit 19.12 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1989 (File No. 0-17691)].*
(10.5) Participation Agreement dated July 31, 1989 between Krupp
Insured Plus-II Limited Partnership and Krupp Insured
Plus-III Limited Partnership. [Exhibit 19.13 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1989 (File No. 0-17691)].*
Windsor Court
(10.6) Supplement to Prospectus for FNMA Pool No. MX-073006
[Exhibit 10.23 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989 (File No. 0-17691).*
(10.7) Subordinated Multifamily Mortgage (including Subordinated
Promissory Note) dated September 26, 1989 between Sexton
1986 Windsor-V, an Indiana limited partnership and Krupp
Insured Plus-III Limited Partnership [Exhibit 10.24 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (File No. 0-17691).*
Harbor Club Apartments
(10.8) Prospectus for GNMA Pool No. 259237(CS) and 259238(PN).
[Exhibit 19.3 to Registrants's Report on Form 10-Q for the
quarter ended March 31,1990 (File No. 0-17691)].*
(10.9) Subordinated Multifamily Mortgage (including Subordinated
Promissory Note) dated January 30, 1990 between Ann Arbor
Harbor Club, a Texas limited partnership and Krupp Insured
Plus-III Limited Partnership. [Exhibit 19.4 to
Registrants's Report on Form 10-Q for the quarter ended
March 31,1990 (File No. 0-17691)].*
Mill Ponds Apartments
(10.10) Prospectus for FNMA Pool No. MX-073012. [Exhibit 19.1 to
Regi-strant's Report on Form 10-Q
for the quarter ended June 30, 1990 (File No. 0-17691)].*
(10.11) Multifamily Mortgage (including Subordinated Promissory
Note) dated May 17, 1990 between State Bank of Countryside,
Illinois and Krupp Insured Plus-III Limited Partnership.
[Exhibit 19.2 to Registrants's Report on Form 10-Q for the
quarter ended June 30, 1990 (File No. 0-17691)].*
Marina Shores Apartments
(10.12) Prospectus for GNMA Pool No. 280971(CS) and 280972(PL).
[Exhibit 19.03 to Registrant's Report on Form 10-Q for
the quarter ended March 31, 1991 (File No. 0-17691)].*
(10.13) Subordinated Multifamily Deed of Trust (including
Subordinated Promissory Note) dated June 27, 1990 between
Marina Shores Associates One, a Virginia limited
partnership and Krupp Insured Plus-III Limited Partnership.
[Exhibit 19.04 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1991 (File No. 0-17691)].*
(10.14) Participation Agreement dated June 29, 1990 by and between
Krupp Insured Plus-III Limited Partnership and Krupp
Insured Mortgage Limited Partnership. [Exhibit 19.05 to
Registrant's Report on Form 10-Q for the quarter ended
March 31, 1991 (File No. 0-17691)].*
Royal Palm Place
(10.15) Prospectus for FNMA Pool No. MB-109057. [Exhibit 10.45 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (File No. 0-17691)].*
(10.16) Subordinated Multifamily Mortgage dated March 20, 1991
between Royal Palm Place, Ltd., a Florida Limited
Partnership and Krupp Insured Plus-III Limited Partnership.
[Exhibit 19.2 to Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991 (File No. 0-17691)].*
(10.17) Modification Agreement dated March 20, 1991, between Royal
Palm Place, Ltd., and Krupp Insured Plus-III Limited
Partnership. [Exhibit 19.3 to Registrant's Report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-17691)].*
(10.18) Participation Agreement dated March 20, 1991 by and between
Krupp Insured Plus-III Limited Partnership and Krupp
Insured Plus Limited Partnership. [Exhibit 19.1 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1991 (File No. 0-17691)].*
(10.19) Amended and Restated Subordinated Promissory Note by and
between Royal Palm, Ltd. and Krupp Insured Plus-III
Limited Partnership.[Exhibit 10.49 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995 (File No. 0-17691)].*
* Incorporated by reference
(c) Reports on Form 8-K
During the last quarter of the year ended December 31, 1998, the
Partnership did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 5th day of
February, 1999
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
By: Krupp Plus Corporation,
a General Partner
By:/s/Douglas Krupp
Douglas Krupp, President, Co-Chairman (Principal
Executive Officer)and Director of Krupp Plus
Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 5th_day of February, 1999.
Signatures Title(s)
/s/Douglas Krupp President, Co-Chairman (Principal Executive
Douglas Krupp Corporation, a General Partner.
/s/George Krupp Co-Chairman (Principal Executive Officer) and
George Krupp Director of Krupp Plus Corporation, a General Partner.
/s/Peter F. Donovan Senior Vice President of Krupp Plus
Peter F. Donovan Corporation, a General Partner.
/s/Robert A. Barrows Treasurer and Chief Accounting Officer of
Robert A. Barrows Krupp Plus Corporation, a General Partner.
F-1
APPENDIX A
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
FINANCIAL STATEMENTS AND SCHEDULE
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1998
F-2
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants F-3
Balance Sheets at December 31, 1998 and 1997 F-4
Statements of Income and Comprehensive Income for the Years
Ended December 31, 1998, 1997 and 1996 F-5
Statements of Changes in Partners' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996 F-7
Notes to Financial Statements F-8 - F-15
Schedule IV - Mortgage Loans on Real Estate F-16 - F-18
All other schedules are omitted as they are not applicable or not required, or
the information is provided in the financial statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Krupp Insured Plus-III Limited Partnership:
In our opinion, the accompanying Financial Statements listed on the index on
Page F-2 of this Form 10-K present fairly, in all material respects, the
financial position of Krupp Insured Plus-III Limited Partnership (the
"Partnership") at December 31, 1998 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion express
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 12, 1999
F-18
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
------------ --------
Participating Insured Mortgages ("PIMs")
(Notes B, C, H and I) $ 70,497,441 $104,165,895
Mortgage-Backed Securities and insured
mortgages ("MBS")(Notes B, D and H) 15,598,230 29,220,457
------------ ------------
Total mortgage investments 86,095,671 133,386,352
Cash and cash equivalents (Notes B, H and I) 6,845,229 35,473,221
Interest receivable and other assets 588,019 949,618
Prepaid acquisition expenses, net of
accumulated amortization of $4,339,027 and
$5,921,472, respectively (Note B) 1,300,234 2,902,255
Prepaid participation servicing fees, net of
accumulated amortization of $1,317,338 and
$1,680,937, respectively (Note B) 471,528 934,014
------------ ------------
Total assets $ 95,300,681 $173,645,460
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 161,439 $ 170,568
------------ ------------
Partners' equity (deficit) (Notes A, E and I):
Limited Partners 94,969,742 172,409,394
(12,770,261 Units outstanding)
General Partners (157,989) (78,838)
Acumulated Comprehensive Income (Note B) 327,489 1,144,336
------------ ------------
Total Partners' equity 95,139,242 173,474,892
------------ ------------
Total liabilities and Partners' equity $ 95,300,681 $173,645,460
============ ============
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 Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- --------
Revenues:(Notes B, C and D)
Interest income - PIMs:
Base interest $ 6,194,599 $10,066,327 $11,262,507
Participation interest 2,092,572 5,996,197 1,371,889
Interest income - MBS 1,694,779 2,389,509 2,705,932
Interest income - other 800,504 444,390 238,382
----------- ----------- -----------
Total revenues 10,782,454 18,896,423 15,578,710
----------- ----------- -----------
Expenses:
Asset management fee to an affiliate
(Note F) 753,279 1,217,413 1,352,679
Expense reimbursements to affiliates
(Note F) 44,473 129,348 123,639
Amortization of prepaid fees and
expenses (Note B) 2,064,507 2,452,816 1,953,298
General and administrative 206,872 203,323 128,059
----------- ----------- -----------
Total expenses 3,069,131 4,002,900 3,557,675
----------- ----------- -----------
Net income (Notes E and G) 7,713,323 14,893,523 12,021,035
Comprehensive Income:
Net Change in unrealized gain/(loss) (816,847) (1,049,719) (1,178,009)
---------------- --------------- ---------------
On MBS
Total Comprehensive Income $ 6,896,476 $13,843,804 $10,843,026
================ =========== ===========
Allocation of net income (Notes E and G):
Limited Partners $ 7,481,923 $14,446,717 $11,660,404
=========== =========== ===========
Average net income per Limited Partner
interest (12,770,261 Limited Partner
interests outstanding) $ .59 $ 1.13 $ .91
=========== =========== ===========
General Partners $ 231,400 $ 446,806 $ 360,631
=========== =========== ===========
The accompanying notes are an
integral part of the financial
statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
Balance at December 31, 1995 $200,575,459 $ (102,556) $ 1,272,626 $ 201,745,529
Net income 11,660,404 360,631 - 12,021,035
Quarterly distributions (15,324,193) (410,687) - (15,734,880)
Special distributions (12,387,057) - - (12,387,057)
Change in unrealized
loss on MBS - - (1,178,009) (1,178,009)
----------- -------- ---------- -----------
Balance at December 31, 1996 184,524,613 (152,612) 94,617 184,466,618
Net income 14,446,717 446,806 - 14,893,523
Quarterly distributions (15,324,194) (373,032) - (15,697,226)
Special distributions (11,237,742) - - (11,237,742)
Change in unrealized
gain on MBS - - 1,049,719 1,049,719
----------- -------- ---------- ------------
Balance at December 31, 1997 172,409,394 (78,838) 1,144,336 173,474,892
Net income 7,481,923 231,400 - 7,713,323
Quarterly distributions (11,110,042) (310,551) - (11,420,593)
Special distributions (73,811,533) - - (73,811,533)
Change in unrealized
loss on MBS - - (816,847) (816,847)
----------- ---------- ----------- ------------
Balance at December 31, 1998 $ 94,969,742 $ (157,989) $ 327,489 $ 95,139,242
========== ============ =========== ============
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- ------
Operating activities:
Net income $ 7,713,323 $ 14,893,523 $12,021,035
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of MBS premium - 92,322 -
Amortization of prepaid fees and expenses 2,064,507 2,452,816 1,953,298
Prepayment penalties and shared
appreciation interest (1,260,785) (4,460,075) (1,013,411)
Changes in assets and liabilities:
Decrease in interest
receivable and other assets 361,599 284,349 690,435
Increase (decrease) in liabilities (9,129) 151,852 3,960
----------- ------------ -----------
Net cash provided by operating
activities 8,869,515 13,414,787 13,655,317
----------- ------------ ----------
Investing activities:
Principal collections on PIMs including
shared appreciation income and prepayment
penalties of $1,249,085 in 1998, $4,460,075 34,917,539 39,674,931 13,098,312
in 1997 and $1,013,411 in 1996, respectively
Principal collections on MBS including a
prepayment premium of $11,700 in 1998 12,817,080 4,651,874 2,601,020
----------- ------------ -----------
Net cash provided by investing
activities 47,734,619 44,326,805 15,699,332
----------- ------------ -----------
Financing activities:
Special distributions (73,811,533) (11,237,742) (12,387,057)
Quarterly distributions (11,420,593) (15,697,226) (15,734,880)
----------- ------------ -----------
Net cash used for financing
activities (85,232,126) (26,934,968) (28,121,937)
----------- ------------ -----------
Net (decrease) increase in cash and
cash equivalents (28,627,992) 30,806,624 1,232,712
Cash and cash equivalents, beginning of
period 35,473,221 4,666,597 3,433,885
----------- ------------ -----------
Cash and cash equivalents, end of period $ 6,845,229 $ 35,473,221 $ 4,666,597
=========== ============ ===========
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
A. Organization
Krupp Insured Plus-III Limited Partnership (the "Partnership") was formed
on March 21, 1988 by filing a Certificate of Limited Partnership in The
Commonwealth of Massachusetts. The Partnership was organized for the
purpose of investing in commercial and multi-family loans and mortgage
backed securities. The Partnership issued all of the General Partner
Interests to Krupp Plus Corporation and Mortgage Services Partners Limited
Partnership in exchange for capital contributions aggregating $3,000. The
Partnership terminates on December 31, 2028, unless terminated earlier
upon the occurrence of certain events as set forth in the Partnership
Agreement.
The Partnership commenced the public offering of Units on June 24, 1988
and completed its public offering having sold 12,770,161 Units for
$254,686,736 net of purchase volume discounts of $716,484 as of June 22,
1990.
B. Significant Accounting Policies
The Partnership uses the following accounting policies for financial
reporting purposes, which differ in certain respects from those used for
federal income tax purposes (Note G):
MBS
The Partnership, in accordance with Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (AFAS 115@), classifies its MBS portfolio as
available-for-sale. 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.
Effective January 1, 1998 the Partnership adopted the, Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive
Income' (FAS 130), was issued establishing standards for reporting
and displaying comprehensive income and its components. FAS 130
requires comprehensive income and its components, as recognized
under accounting standards, to be displayed in a financial
statement with the same prominence as other financial statements,
if material. Accordingly, unrealized gains (losses) on the
Partnership's available-for sale securities have been included in
other comprehensive income.
The Federal Housing Administration MBS is carried at amortized cost
unless the General Partner of the Partnership believes there is an
impairment in value, in which case a valuation allowance would be
established in accordance with Financial Accounting Standards No.
114, "Accounting by Creditors for impairment of a Loan," and
Financial Accounting Standard No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." The
Partnership also has insured non-participating mortgage loans. Such
loans are carried at amortized cost.
PIMs
The Partnership accounts for its MBS portion of a PIM in accordance
with FAS 115 under the classification of held to maturity. The
Partnership carries the Government National Mortgage Association
(AGNMA@) or Fannie Mae MBS at amortized cost.
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
B. Significant Accounting Policies, Continued
The Federal Housing Administration PIM is carried at amortized cost
unless the General Partner of the Partnership believes there is an
impairment in value, in which case a valuation allowance would be
established in accordance with Financial Accounting Standards No.
114, AAccounting by Creditors for Impairment of a Loan, and
Financial Accounting Standard No. 118, AAccounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures.
Basic interest on PIMs is recognized based on the stated rate of
the Federal Housing Administration ("FHA") mortgage loan (less the
servicer's fee) or the stated coupon rate of the GNMA or FNMA MBS.
Participation interest is recognized as earned and when deemed
collectible by the Partnership.
Cash and Cash Equivalents
The Partnership includes all short-term investments with maturities
of three months or less from the date of acquisition in cash and
cash equivalents. The Partnership invests its cash primarily in
commercial paper and money market funds with a commercial bank and
has not experienced any loss to date on its invested cash.
Prepaid Expenses and Fees
Prepaid expenses and fees consist of prepaid acquisition fees and
expenses and prepaid participation servicing fees paid for the
acquisition and servicing of PIMs.
The Partnership amortizes the prepaid acquisition fees and expenses
using a method that approximates the effective interest method over
a period of ten to twelve years, which represents the actual
maturity or anticipated payoff of the underlying mortgage.
The Partnership amortizes prepaid participation servicing fees
using a method that approximates the effective interest method over
a ten year period beginning at final endorsement of the loan if a
Department of Housing and Urban Development ("HUD") insured loan or
GNMA loan and at closing if a FNMA loan.
Income Taxes
The Partnership is not liable for federal or state income taxes
because Partnership income is allocated to the partners for income
tax purposes. If the Partnership's tax returns are examined by the
Internal Revenue Service or state taxing authority and such an
examination results in a change in Partnership taxable income, such
change will be reported to the partners.
Estimates and Assumptions
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities, contingent assets and liabilities and
revenues and expenses during the period. Actual results could
differ from those estimates.
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMs
At December 31, 1998, the Partnership has investments in six PIMs.
The Partnership's PIMs consist of a GNMA or Fannie Mae MBS
representing the securitized first mortgage loan on the underlying
property or a sole participation interest in a first mortgage loan
originated under the FHA lending program on the underlying property
(collectively the "insured mortgages"), and participation interests
in the revenue stream and appreciation of the underlying property
above specified base levels.
The borrower conveys these participation features to the
Partnership generally through a subordinated mortgage (the
"Agreement"). The Partnership receives guaranteed monthly payments
of principal and interest on the GNMA and Fannie Mae MBS and HUD
insures the first mortgage loan underlying the GNMA MBS and the FHA
mortgage loan. The borrower usually can not prepay the first
mortgage loan during the first five years and may prepay the first
mortgage loan thereafter subject to a 9% prepayment penalty in
years six through nine, a 1% prepayment penalty in year ten and no
prepayment penalty thereafter. The Partnership may receive interest
related to its participation interests in the underlying property,
however, these amounts are neither insured nor guaranteed.
Generally, the participation features consist of the following: (I)
"Minimum Additional Interest" at a stated rate ranging from .5% to
.75% per annum calculated on the unpaid principal balance of the
first mortgage on the underlying property , (ii) "Shared Income
Interest" ranging from 25% to 30% of the monthly gross rental
income generated by the underlying property in excess of a
specified base, but only to the extent that it exceeds the amount
of Minimum Additional Interest received during such month, (iii)
"Shared Appreciation Interest" ranging from 25% to 30% of any
increase in Value of the underlying property in excess of a
specified base. Payment of participation interest from the
operations of the property is limited to 50% of net revenue or
surplus cash as defined by Fannie Mae or HUD, respectively. The
aggregate amount of Minimum Additional Interest, Shared Income
Interest and Shared Appreciation Interest payable on the maturity
date by the underlying borrower generally cannot exceed 50% of any
increase in value of the property. However, generally any net
proceeds from the sale or refinancing of the underlying property
will be available to satisfy any accrued but unpaid Shared Income
or Minimum Additional interest.
Shared Appreciation Interest is payable when one of the following
occurs: (1) the sale of the underlying property to an unrelated
third party on a date which is later than five years from the date
of the Agreement, (2) the maturity date or accelerated maturity
date of the Agreement, or (3) prepayment of amounts due under the
Agreement and the insured mortgage.
Under the Agreement, the Partnership, upon giving twelve months
written notice, can accelerate the maturity date of the Agreement
and insured mortgage to a date not earlier than ten years from the
date of the Agreement for (a) the payment of all participation
interest due under the Agreement as of the accelerated maturity
date, or (b) the payment of all participation interest due under
the Agreement plus all amounts due on the first mortgage note on
the property.
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMs, Continued
On October 15, 1998, the Partnership received a prepayment of the
Ironwood Apartments PIM in the amount of $4,844,256 plus a
prepayment premium of $325,000 and shared interest income of
$226,507, which was received in September 1998. The Partnership
made a special distribution of $.41 per Limited Partner interest
from this prepayment on December 2, 1998.
On September 23, 1998 the Partnership received a prepayment of the
Woodbine Apartments PIM in the amount of $4,180,266, plus a
prepayment premium of $376,224 and shared interest income of
$109,939. The Partnership made a special distribution of $.36 per
Limited Partner interest from this prepayment on December 4, 1998.
On June 15, 1998, the Partnership received a prepayment of the
Sundance Apartments PIM in the amount of $7,187,778. The property
had been operating under a modification agreement with the
Partnership; consequently no prepayment premium or participation
income was due at the time of the prepayment. The Partnership made
a special distribution of $.56 per Limited Partner interest from
this prepayment on July 24, 1998.
On February 17, 1998, the Partnership received a prepayment of the
Rosewood Apartments PIM in the amount of $5,047,132. In addition,
during January 1998 the Partnership received minimum additional
interest and shared interest income of $151,263 and a prepayment
premium of $304,242. The Partnership made a special distribution of
$.42 per Limited Partner interest from this prepayment on April 13,
1998.
In January 1998, the Partnership received proceeds from the Fourth
Ward Square and Meredith Square Apartment PIM prepayments in the
amounts of $7,067,690 and $4,688,895 respectively. In addition,
during December 1997 the Partnership received $397,462 of minimum
additional interest and shared interest income earned on property
operations for these properties, a $422,001 prepayment premium on
Meredith Square and Shared Appreciation Interest of $697,500 on
Fourth Ward Square. The Partnership made a special distribution of
$1.01 per Limited Partner interest from these prepayments on
February 27, 1998.
During December 1997, the Partnership received prepayments of the
Paddock Park II, Paddock Park Tallahassee and Paddock Jacksonville
Apartment PIMs. The Partnership received the outstanding principal
balances of $10,167,304, $8,402,247 and $8,145,328 respectively. In
addition, the Partnership also received Shared Appreciation or
prepayment penalties of $1,153,308, $774,000, and $734,073 and
Minimum and Shared Income Interest of $211,835, $170,377, and
$345,902 for Paddock Park II, Paddock Park Tallahassee and Paddock
Park Jacksonville PIMs, respectively. The Partnership made a
special distribution of $2.30 per Limited Partner interest with the
proceeds from the outstanding principal proceeds and the prepayment
penalties during January 1998.
On April 25, 1997, the Partnership received a prepayment of the
Paces Arbor and Paces Forest Apartment PIMs. The Partnership
received the outstanding principal balances of $3,390,705 and
$4,155,888, respectively. In addition, the Partnership also
received a prepayment penalty of $679,193 and Minimum Additional
and Shared Income Interest of $197,939. On May 23, 1997, the
Partnership made a special distribution of $.65 per Limited Partner
interest with the proceeds from the outstanding principal proceeds
and the prepayment penalty.
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMs, Continued
At December 31, 1998 and 1997 there were no loans within the
Partnership=s portfolio that were delinquent as to principal or
interest.
Listed in the chart is a summary of the Partnership's PIM
investments at December 31, 1998 and 1997:
Aggregate Permanent Aggregate Outstanding
Original Number Interest Maturity Principal Balance at
Issuer Principal of PIMs Rate Range Date Range December 31,
1998 1997
Fannie Mae $ 38,128,742 3 7.0% - 7.5% 10/99 - 4/06 $35,817,597 $40,908,767
(a) (a) (a)
GNMA 35,615,417 3 8% 8/30/ -5/32 34,679,844 59,061,999
(b)
FHA 4,327,800 (c) - 4,195,129
---------- ----------- ----------
$ 78,071,959 6 $70,497,441 $104,165,895
========== - =========== ============
(a) Includes the Partnership's share of the Royal Palm Place PIM, in which
the Partnership holds 73% of the $22,000,000 total PIM and an affiliate
of the Partnership holds the remaining 27%. During December 1995, the
Partnership agreed to a modification of the Royal Palm PIM. The
Partnership received a reissued Fannie Mae mortgage-backed security
("MBS") and increased its participation percentage in income and
appreciation from 25% to 30%. The Partnership will receive interest only
payments on the Fannie Mae MBS at interest rates ranging from 6.25% to
8.775% per annum through maturity. The Partnership will also receive its
pro-rata share of annual principal payments totaling $250,000 due each
year in January for the next two years.
(b) Includes the Partnership's share of the Marina Shores PIM in which the
Partnership holds 71% of the $21,200,000 total PIM and an affiliate of
the Partnership holds the remaining 29%.
(c) The Partnership had one FHA PIM as of December 31, 1997. During 1998
the Parnership received a prepayment of the Woodbine Apartments PIM.
The underlying mortgages of the PIMs are collateralized by multi-family
apartment complexes located in 5 states. The apartment complexes range in
size from 154 to 392 units.
D. MBS
On June 19, 1998, the Partnership received a prepayment of the Brookside
MBS in the amount of $2,944,531, representing the outstanding principal
balance and a prepayment premium of $11,700. On April 24, 1998, the
Partnership received a prepayment of the Regency Park MBS in the amount
of $6,232,557, representing the outstanding principal balance. The
Partnership made a special distribution of $.72 per Limited Partner
interest from these prepayments on July 24, 1998.
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
D. MBS, continued
During the fourth quarter of 1997, the Partnership received a prepayment
on a multi-family MBS in the amount of $2,889,030. The Partnership then
made a special distribution of $.23 per Limited Partner interest with the
proceeds from this prepayment.
At December 31, 1998, the Partnership's MBS portfolio had an amortized
cost of $7,194,406 and unrealized gains of $327,489. The MBS portfolio
has maturity dates ranging from 2010 to 2035. At December 31, 1997, the
Partnership's MBS portfolio had an amortized cost of $28,076,121 and
unrealized gains and losses of approximately $1,144,469 and $133,
respectively. At December 31, 1998 the Partnership had an insured
mortgage loan at an amortized cost of $8,076,335.
E. Partners' Equity
Under the terms of the Partnership Agreement, profits from Partnership
operations and Distributable Cash Flow are allocated 97% to the
Unitholders and Corporate Limited Partner (the "Limited Partners") and 3%
to the General Partners.
Upon the occurrence of a capital transaction, as defined in the
Partnership Agreement, net cash proceeds and profits from the capital
transaction will be distributed first, to the Limited Partners until they
have received a return of their total invested capital, second, to the
General Partners until they have received a return of their total
invested capital, third, 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners receive an amount equal to
any deficiency in the 11% cumulative return on their invested capital
that exists through fiscal years prior to the date of the capital
transaction, fourth, to the class of General Partners until they have
received an amount equal to 4% of all amounts of cash distributed under
all capital transactions and fifth, 96% to the Limited Partners and 4% to
the General Partners. Losses from a capital transaction will be allocated
97% to the Limited Partners and 3% to the General Partners.
As of December 31, 1998, the following cumulative partner contributions
and allocations have been made since inception of the Partnership:
Corporate Accumulated Total
Limited General Comprehensive Partners'
Unitholders Partner Partners Income Equity
Capital contributions $254,686,736 $ 2,000 $ 3,000 $ - $254,691,736
Syndication costs (15,834,700) - - - (15,834,700)
Distributions (172,686,605) (1,463) (4,065,323) - (176,753,391)
Special Distributions (97,435,569) (763) - - (97,436,332)
Net income 126,239,048 1,058 3,904,334 - 130,144,440
Unrealized gain on MBS - - - 327,489 327,489
----------- ------- --------- ------- ----------
Total at December 31,
1998 $ 94,968,910 $ 832 $ (157,989) $ 327,489 $95,139,242
============ ======== ========== ========= ===========
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
F. Related Party Transactions
Under the terms of the Partnership Agreement, the General Partners or
their affiliates are paid an Asset Management Fee equal to .75% per annum
of the remaining face value of the Partnership's mortgage assets, payable
quarterly. The General Partners may also receive an incentive management
fee in the amount equal to .3% per annum on the Partnership's total
invested assets provided the Unitholders have received their specified
non-cumulative return on their Invested Capital. Total Asset Management
Fees and Incentive Management Fees payable to the General Partners or
their affiliates shall not exceed 10% of Distributable Cash Flow over the
life of the Partnership.
Additionally, the Partnership reimburses affiliates of the General
Partners for certain expenses incurred in connection with maintaining the
books and records of the Partnership and the preparation and mailing of
financial reports, tax information and other communications to the
investors.
G. Federal Income Taxes
The reconciliation of the net income reported in the accompanying
statement of income with the net income reported in the Partnership's 1998
federal income tax return is as follows:
Net income per statement of income $ 7,713,323
Less: Book to tax difference for amortization
of prepaid expenses and fees (254,130)
Net income for federal income tax purposes $ 7,459,193
===========
The allocation of the net income for federal income tax purposes for
1998 is as follows:
Portfolio
Income
Unitholders $ 7,273,183
Corporate Limited Partner 57
General Partners 185,953
$ 7,459,193
During the years ended December 31, 1998, 1997 and 1996 the average per
Unit net income to the Unitholders for federal income tax purposes was
$.57, $1.11 and $1.00, respectively.
The basis of the Partnership's assets for financial reporting purposes is
less than its tax basis by approximately $1,336,000 and $773,000 at
December 31, 1998 and 1997, respectively. The basis of the Partnership's
liabilities for financial reporting purposes are the same as its tax
basis at December 31, 1998 and 1997, respectively
H. Fair Value Disclosures of Financial Instruments
The Partnership uses the following methods and assumptions to estimate
the fair value of each class of financial instrument:
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
H. Fair Value Disclosures of Financial Instruments, continued
Cash and cash equivalents
The carrying amount approximates the fair value because of the short
maturity of those instruments.
MBS
The Partnership estimates the fair value of MBS based on quoted market
prices. Insured Mortgage loans are valued in a manner consistent with
PIMs as described below:
PIMs
There is no active trading market for these investments. Management
estimates the fair value of the PIMs using quoted market prices of MBS
having the same stated coupon rate. Management does not include any
participation income in the Partnership=s estimated fair value arising
from appreciation of the properties, because Management does not believe
it can predict the time of realization of the feature with any certainty.
Based on the estimated fair value determined using these methods and
assumptions, the Partnership's investments in PIMs had gross unrealized
gains of $1,753,057 at December 31, 1998, respectively, and gross
unrealized gains and losses of $1,407,000 and $57,000 at December 31,
1997, respectively.
At December 31, 1998 and 1997, the Partnership estimates the fair values
of its financial instruments as follows:
(rounded to thousands)
1998 1997
------------------- -----------
Fair Carrying Fair Carrying
Value Value Value Value
Cash and cash equivalents $ 6,845 $ 6,845 $ 35,473 $ 35,473
MBS 15,598 15,598 29,220 29,220
PIMs 72,250 70,497 105,516 104,166
-------- ------- -------- --------
$ 94,693 $ 92,940 $170,209 $168,859
======== ======== ======== ========
I. Subsequent Event
On January 25, 1999, the Partnership received proceeds from the
prepayment of the Windsor Court Apartments PIM. The Partnership received
the outstanding principal balance of $10,876,051 plus, minimum and shared
income interest of $298,160 and a prepayment penalty of $243,620. The
Partnership plans on distributing $.88 per Limited Partner Interest in
February, 1999 from the principal proceeds and prepayment penalty income
received on this loan.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
-
Approx.
Normal
Maturity Monthly Original Current Carrying
Interest Date Payment Face Face Amount at
PIMs (a) Rate (b) (j) (k) Amount Amount 12/31/98 (o)
- - -------- -------- -------- ------- ------ ------ ------------
GNMA
Casa Marina 8.00% 12/15/30 $ 49,000 $ 7,099,700 $ 6,843,745 $ 6,843,745
Apts. (d) (f) (h)
Miami, FL
Harbor Club 8.00% 10/15/31 97,000 13,562,000 13,266,253 13,266,253
Apts. (e)
Ann Arbor, MI (i) (l)
Marina Shores 8.00% 5/15/32 104,000 14,953,717 14,569,846 14,569,846
---------- ---------- ----------
Apts.
VA Beach, VA (c) (f) (h)
35,615,417 34,679,844 34,679,844
- - ---------- ----------
FNMA
Mill Ponds 7.50% 6/1/00 70,000 10,450,000 9,813,121 9,813,121
Apts. (c) (f) (g) (n)
Naperville, IL
Royal Palm Pl. 7.00% 4/1/06 111,000 15,978,742 15,128,425 15,128,425
Apts (c) (m)
Kendall, FL (n)
Windsor Court 7.25% 10/1/99 77,000 11,700,000 10,876,051 10,876,051
------------ ----------- -----------
Apts. (c) (e) (g) (n)
Indianapolis,
IN
38,128,742 35,817,597 35,817,597
Total $ 73,744,159 $70,497,441 $70,497,441
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE, continued
December 31, 1998
-
(a) The Participating Insured Mortgages ("PIMs") consist of either
a mortgage-backed security ("MBS") issued and guaranteed by
the Federal National Mortgage Association ("FNMA"), or an MBS
issued or guaranteed by the Government National Mortgage
Association ("GNMA") and a subordinated promissory note and
mortgage or shared income and appreciation agreement with the
underlying Borrower that conveys participation interests in
the revenue stream and appreciation of the underlying property
above certain specified base levels.
(b) Represents the permanent interest rate of the GNMA or Fannie
Mae MBS. The Partnership may also receive additional interest,
consisting of (i) Minimum Additional Interest based on a
percentage of the unpaid principal balance of the first
mortgage on the property, (ii) Shared Income Interest based on
a percentage of monthly gross income generated by the
underlying property in excess of a specified base amount (but
only to the extent it exceeds the amount of Minimum Additional
Interest received during such month), (iii) Shared Appreciation
Interest based on a percentage of any increase in the value of
the underlying property in excess of a specified base value.
(c) Minimum additional interest is at a rate of .5% per annum
calculated on the unpaid principal balance of the first mortgage
note.
(d) Minimum additional interest is at a rate of .75% per annum
calculated on the unpaid principal balance of the first mortgage
note.
(e) Shared income interest is based on 25% of monthly gross rental
income over a specified base amount.
(f) Shared income interest is based on 30% of monthly gross rental
income over a specified base amount.
(g) Shared appreciation interest is based on 25% of any increase in
the value of the project over the specified base value.
(h) Shared appreciation interest is based on 30% of any increase in the
value of the project over the specified base value.
(i) Shared appreciation interest is based on 35% of any increase in the
value of the project over the specified base value.
(j) The Partnership's GNMA MBS have call provisions, which allow
the Partnership to accelerate their respective maturity date.
(k) The normal monthly payment consisting of principal and interest is
payable monthly at level amounts over the term of the GNMA MBS.
The normal monthly payment consisting of principal and interest
for Fannie Mae MBS is payable at level amounts based on a 35
year amortization and all remaining unpaid principal and
accrued interest is due at the end of year ten. The GNMA MBS
and Fannie Mae MBS may not be prepaid during the first five
years and may generally be prepaid subject to a 9% prepayment
penalty in years six through nine, a 1% prepayment penalty in
year ten and no prepayment penalty after year ten.
Continued
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE, continued
December 31, 1998
-
(l) On April 7, 1992, the Partnership entered into an agreement
which provided for a one-year reduction in the interest rate on
the Harbor Club-Ann Arbor PIM from 8% to 6% for one year
retroactive to February 1, 1992 and to 7% for the following
year. In exchange for the reduction, the Minimum Additional
Interest increased from .50% to .75% and the Shared
Appreciation Interest Base decreased from $14,570,000 to
$13,562,000.
(m) During December 1995, the Partnership agreed to a modification
of the Royal Palm PIM. The Partnership received a reissued
Federal National Mortgage Association ("FNMA") mortgage-backed
security ("MBS") and increased its participation percentage in
income and appreciation from 25% to 30%. The Partnership will
also receive its pro-rata share of annual principal payments
totaling $250,000 due each year in January for the next two
years.
(n) The approximate principal balance due at maturity for each PIM,
listed below, is as follows:
PIM Amount
----------- ------
Mill Ponds Apartments $ 9,655,000
Royal Palm Place Apartment $14,766,010
Windsor Court Apartments $10,767,000
(o) The aggregate cost of PIMs for federal income tax purposes is
$70,497,441.
A reconciliation of the carrying value of PIMs for each of the
three years in the period ended December 31, 1998 is as
follows:
1998 1997 1996
---- ---- ----
Balance at beginning of period $104,165,895 $139,380,751 $151,465,652
Deductions during period:
Principal collections (33,668,454) (35,214,856) (12,084,901)
----------- ------------ ------------
Balance at end of period $ 70,497,441 $104,165,895 $139,380,751
============ ============ ============