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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ---------------------
Commission file number 0-17691
Krupp Insured Plus - III Limited Partnership
(Exact name of registrant as specified in its charter)
Massachusetts 04-3007489
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
SEC 1296 (08-03) Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
pre-payments of mortgages; failure of borrowers to pay participation interests
due to poor operating results of properties underlying the mortgages; uninsured
losses and potential conflicts of interest between the Partnership and its
Affiliates, including the General Partners. The Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 2002, contain additional information concerning such
risk factors. Actual results in the future could differ materially from those
described in any forward-looking statements as a result of the risk factors set
forth above, and the risk factors described in the Annual Report.
-2-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
BALANCE SHEETS
--------------
ASSETS
September 30, December 31,
2003 2002
------------- ------------
Participating Insured Mortgages ("PIMs")(Note 2) $ 12,809,346 $ 12,893,859
Mortgage-Backed Securities and insured
mortgage ("MBS")(Note 3) 1,473,337 10,157,171
------------ ------------
Total mortgage investments 14,282,683 23,051,030
Cash and cash equivalents 1,338,039 1,209,070
Interest receivable and other assets 100,288 156,686
------------ ------------
Total assets $ 15,721,010 $ 24,416,786
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 23,547 $ 40,505
------------ ------------
Partners' equity (deficit)(Note 4):
Limited Partners
(12,770,261 Limited Partner interests outstanding) 15,778,100 24,429,938
General Partners (197,214) (196,121)
Accumulated comprehensive income 116,577 142,464
------------ ------------
Total Partners' equity 15,697,463 24,376,281
------------ ------------
Total liabilities and Partners' equity $ 15,721,010 $ 24,416,786
============ ============
The accompanying notes are an integral
part of the financial statements.
-3-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- --------------------------
2003 2002 2003 2002
--------- -------- ----------- ----------
Revenues:
Interest income - PIMs:
Basic interest $ 256,379 $258,595 $ 770,840 $ 880,393
Participation interest -- -- -- 1,339,172
Interest income - MBS 29,783 197,883 483,588 609,225
Other interest income 3,293 7,492 30,235 49,464
--------- -------- ----------- ----------
Total revenues 289,455 463,970 1,284,663 2,878,254
--------- -------- ----------- ----------
Expenses:
Asset management fee to an affiliate 26,988 44,279 96,125 142,563
Expense reimbursements to affiliates 28,674 26,817 115,509 72,898
Amortization of prepaid fees and expenses -- 8,730 -- 62,385
General and administrative 35,632 29,095 118,612 108,252
--------- -------- ----------- ----------
Total expenses 91,294 108,921 330,246 386,098
--------- -------- ----------- ----------
Net income 198,161 355,049 954,417 2,492,156
Other comprehensive income:
Net change in unrealized gain on MBS (24,740) 1,001 (25,887) 16,438
--------- -------- ----------- ----------
Total comprehensive income $ 173,421 $356,050 $ 928,530 $2,508,594
========= ======== =========== ==========
Allocation of net income (Note 4):
Limited Partners $ 192,216 $344,397 $ 925,784 $2,417,391
========= ======== =========== ==========
Average net income per Limited
Partner interest (12,770,261
Limited Partner interests outstanding) $ .01 $ .03 $ .07 $ .19
========= ======== =========== ==========
General Partners $ 5,945 $ 10,652 $ 28,633 $ 74,765
========= ======== =========== ==========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
-------------------
For the Nine Months
Ended September 30,
------------------------------
2003 2002
----------- ------------
Operating activities:
Net income $ 954,417 $ 2,492,156
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid fees and expenses -- 62,385
Shared Appreciation Interest -- (1,004,379)
Prepayment premium (235,918) --
Changes in assets and liabilities:
Decrease in interest receivable and other assets 56,398 115,864
Decrease in liabilities (16,958) (1,938)
----------- ------------
Net cash provided by operating activities 757,939 1,664,088
----------- ------------
Investing activities:
Principal collections on PIMs including Shared Appreciation
Interest of $1,004,379 in 2002 84,513 15,846,283
Principal collections on MBS including a prepayment premium
of $235,918 in 2003 8,893,865 925,390
----------- ------------
Net cash provided by investing activities 8,978,378 16,771,673
----------- ------------
Financing activities:
Quarterly distributions (1,434,445) (3,120,800)
Special distributions (8,172,903) (15,835,000)
----------- ------------
Net cash used for financing activities (9,607,348) (18,955,800)
----------- ------------
Net increase (decrease) in cash and cash equivalents 128,969 (520,039)
Cash and cash equivalents, beginning of period 1,209,070 1,900,744
----------- ------------
Cash and cash equivalents, end of period $ 1,338,039 $ 1,380,705
=========== ============
Non cash activities:
Increase (decrease) in unrealized gain on MBS $ (25,887) $ 16,438
=========== ============
The accompanying notes are an integral
part of the financial statements.
-5-
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, 2002 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 September 30, 2003, its results
of operations for the three and nine months ended September 30, 2003 and
2002 and its cash flows for the nine months ended September 30, 2003 and
2002.
The results of operations for the three and nine months ended September
30, 2003 are not necessarily indicative of the results which may be
expected for the full year. See Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this report.
2. PIMs
At September 30, 2003, the Partnership's remaining PIM had a fair value of
approximately $12,809,346. Fair value assumes that the GNMA MBS portion of
the PIM could be sold at prices that MBS with similar interest rates are
currently being sold at. Fair value does not include any value for the
participation feature. The PIM matures in 2031 and at September 30, 2003
was not delinquent as to principal or interest.
3. MBS
At September 30, 2003, the Partnership's MBS portfolio had an amortized
cost of $1,356,760 and gross unrealized gains of $116,577. The portfolio
has maturities ranging from 2016 to 2024.
On April 10, 2003, the Partnership received a prepayment of the Signature
Point insured mortgage for $7,863,532. The Partnership also received a
prepayment premium of $235,918 from this payoff. On May 5, 2003, the
Partnership paid a special distribution of $0.64 per Limited Partner
interest from the proceeds received.
Continued
-6-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the nine months ended
September 30, 2003 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------ --------- --------- ------------
Balance at December 31, 2002 $ 24,429,938 $(196,121) $ 142,464 $ 24,376,281
Net income 925,784 28,633 -- 954,417
Quarterly distributions (1,404,719) (29,726) -- (1,434,445)
Special distribution (8,172,903) -- -- (8,172,903)
Change in unrealized gain on MBS -- -- (25,887) (25,887)
------------ --------- --------- ------------
Balance at September 30, 2003 $ 15,778,100 $(197,214) $ 116,577 $ 15,697,463
============ ========= ========= ============
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and accompanying notes contained in the Partnership's 2002
Annual Report on Form 10-K and in this report on Form 10-Q.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report on Form 10-Q
constitute "forward-looking statements" within the meaning of the Federal
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Partnership's actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among other things, federal, state or local regulations; adverse changes in
general economic or local conditions; pre-payments of mortgages; 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 September 30, 2003, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $1.3 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
distribution paid to investors of approximately $383,000. Funds for the
quarterly distributions come from scheduled monthly principal and interest
payments received on the remaining PIM and MBS, the principal prepayments of the
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 will also decrease
and over time will result in periodic adjustments to the distributions paid to
investors. The General Partners periodically review the distribution rate to
determine whether an adjustment is necessary based on projected future cash
flows. In general, the General Partners try to set a distribution rate that
provides for level quarterly distributions. To the extent that quarterly
distributions do not fully utilize the cash available for distributions and cash
balances increase, the General Partners may adjust the distribution rate or
distribute such funds through a special distribution. Based on current
projections, the General Partners have determined that the Partnership will
continue to pay a distribution rate of $0.03 per Limited Partner interest per
quarter for the near future.
On April 10, 2003, the Partnership received a prepayment of the Signature Point
insured mortgage for $7,863,532. The Partnership also received a prepayment
premium of $235,918 from this payoff. On May 5, 2003, the Partnership paid a
special distribution of $0.64 per Limited Partner interest from the proceeds
received.
In addition to providing insured and guaranteed monthly principal and basic
interest payments from the GNMA MBS portion of the PIM, 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 expect the property to be
refinanced during late 2003 or early 2004. There are no contractual obligations
remaining that would prevent a prepayment of the first mortgage loan. In
response to more competitive market conditions brought on by low interest rates
and low unemployment, which encourages more home ownership, Harbor Club began
offering generous concessions to attract residents. Although physical occupancy
is in the mid 90% range, the economic occupancy continues to hover in the mid
80% range as a result of the concessions. Due to the effect of the low occupancy
on property operations and cash flow, the General Partners do not expect Harbor
Club to pay the Partnership any participation interest during 2003.
In the event that the Harbor Club PIM is paid off, the Partnership would then
commence an orderly liquidation of the remaining assets of the Partnership and
subsequently pay a liquidating distribution.
In the event that the remaining PIM does not pay off as discussed above, the
Partnership does have the option to call this PIM by accelerating its maturity.
If the call feature is exercised then the insurance feature of the loan would be
canceled.
-8-
Therefore, the Partnership will determine the merits of exercising the call
option as economic conditions warrant. Such factors as the condition of the
asset, local market conditions, the interest rate environment and availability
of financing will affect this decision.
Critical Accounting Policies
The Partnership's critical accounting policies relate to revenue recognition
related to the Partnership's remaining PIM investment, the amortization of
Prepaid Fees and Expenses and the carrying value of the MBS. The Partnership's
policies are as follows:
The Partnership accounts for its MBS portion of its PIM investment in accordance
with Financial Accounting Standards Board's Statement 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"), under the
classification of held to maturity as this investment has a participation
feature. As a result, the Partnership would not sell or otherwise dispose of the
MBS. Accordingly, the Partnership has both the intention and ability to hold
this investment to expected maturity. The Partnership carries this MBS at
amortized cost. The Partnership, in accordance with FAS 115, classifies its MBS
portfolio as available-for-sale. The Partnership classifies its MBS portfolio as
available-for-sale as a portion of the MBS portfolio may remain after all of the
PIMs pay off and that it will be necessary to then sell the remaining MBS
portfolio at that time in order to close out the Partnership. In addition, other
situations such as liquidity needs could arise which would necessitate the sale
of a portion of the MBS portfolio. As such, the Partnership carries its MBS at
fair market value and reflects any unrealized gains (losses) as a separate
component of Partners' Equity. The Partnership amortizes purchase premiums or
discounts over the life of the underlying mortgages using the effective interest
method. The Partnership also held a Federal Housing Administration ("FHA")
insured mortgage which was classified as an MBS. The Partnership held this loan
at amortized cost and did not establish loan loss reserves on this investment as
it was fully insured by the FHA.
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 finalized, cash is received and all contingencies are resolved. This could be
the sale or refinancing of the underlying real estate, which results in a cash
payment to the Partnership or a cash payment made to the Partnership from
surplus cash relative to the participation feature.
Prepaid fees and expenses consisted of prepaid acquisition fees and expenses and
prepaid participation servicing fees paid for the acquisition and servicing of
PIMs. The Partnership amortized the prepaid acquisition fees and expenses using
a method that approximated the effective interest method over a period of ten to
twelve years, which represented the estimated life of the underlying mortgage.
The Partnership amortized prepaid participation servicing fees using a method
that approximated the effective interest method over a ten year period beginning
at final endorsement of the GNMA loan and at closing if a Fannie Mae loan. Upon
the repayment of a PIM, any unamortized acquisition fees and expenses and
unamortized participation servicing fees related to such loan were expensed.
Results of Operations
Net income decreased for the three months ended September 30, 2003 as compared
to the same period ending September 30, 2002 primarily due to a decrease in MBS
interest income and other interest income. This decrease is partially offset by
decreases in asset management fees and amortization expense. MBS interest income
decreased due primarily to the payoff of the Signature Pointe MBS in April 2003.
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 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
prepaid fees and expenses associated with the Harbor Club PIM being fully
amortized as of the end of 2002.
Net income decreased for the nine months ended September 30, 2003 as compared to
the same period ending September 30, 2002 primarily due to decreases in
participation interest, MBS interest income, and basic interest income on PIM's
and an increase in expense reimbursement to affiliates. These are partially
offset by decreases in amortization expense and asset management fees.
Participation interest was greater in 2002 due to the collection of Shared
Appreciation Interest and Minimum Additional interest from the Royal Palm Place
PIM payoff in February 2002. MBS interest income decreased due to the prepayment
of the Signature Pointe MBS in April 2003 and principal collections on the
single family MBS. Basic interest income on PIM's decreased due to the Royal
Palm Place PIM payoff mentioned above. Expense reimbursement to affiliates
increased primarily due to a change in the estimated cost of services provided
to the Partnership in 2002. Amortization expense decreased due to the prepaid
fees and expenses associated with the Harbor Club PIM being fully amortized as
of the end of 2002. Asset management fees decreased due to the decline in the
Partnership's asset base as a result of principal collections and prepayments.
-9-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Partnership's investments in its MBS portion of its PIM and MBS are
guaranteed and/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. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States, and both have significant experience in mortgage
securitizations. In addition, their MBS carry the highest credit rating given to
financial instruments. GNMA guarantees the full and timely payment of principal
and basic interest on the securities it issues, which represents interest in
pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the
U.S. Government, are backed by the full faith and credit of the U.S. Government.
At September 30, 2003, the Partnership includes in cash and cash equivalents
approximately $800,000 of commercial paper, which is issued by entities with a
credit rating equal to one of the top two rating categories of a nationally
recognized statistical rating organization.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk, which
can be defined as the exposure of the Partnership's net income, comprehensive
income or financial condition to adverse movements in interest rates. At
September 30, 2003, the Partnership's remaining PIM and MBS comprise the
majority of the Partnership's assets. Decreases in interest rates may accelerate
the prepayment of the Partnership's investments. Increases in interest rates may
decrease the proceeds from a sale of the MBS. The Partnership does not utilize
any derivatives or other instruments to manage this risk as the Partnership
plans to hold its PIM investment to expected maturity, while it is expected that
substantially all of the MBS will prepay over the same period, thereby
mitigating any potential interest rate risk to the disposition value of any
remaining MBS
The Partnership monitors prepayments and considers prepayment trends, as well as
distribution requirements of the Partnership, when setting regular distribution
policy. For MBS, the Partnership forecasts prepayments based on trends in
similar securities as reported by statistical reporting entities such as
Bloomberg. For its remaining PIM, the Partnership incorporates prepayment
assumptions into planning as the property notifies the Partnership of the intent
to prepay or as it matures.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Senior Vice President and Chief Accounting Officer of Krupp Plus Corporation, a
general partner of the Partnership, carried out an evaluation of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures. Based upon that evaluation, the Senior Vice President
and the Chief Accounting Officer concluded that the Partnership's disclosure
controls and procedures were effective as of the date of their evaluation in
timely alerting them to material information relating to the Partnership
required to be included in this Quarterly Report on Form 10-Q.
(b) Changes in Internal Controls
There were no significant changes in the Partnership's internal controls or in
other factors that could significantly affect such internal controls subsequent
to the date of the evaluation described in paragraph (a) above.
-10-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
-------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(31.1) Senior Vice President Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(31.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(32.1) Senior Vice President Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(32.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
-11-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Krupp Insured Plus-III Limited Partnership
(Registrant)
BY: /s/ Alan Reese
-------------------------------
Alan Reese
Treasurer and Chief Accounting Officer of
Krupp Plus Corporation, a General Partner.
DATE: October 30, 2003
-12-