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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 June 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 0-17691
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
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
SEC 1296 (01-04) Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
-1-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
pre-payments of mortgages; uninsured losses and potential conflicts of interest
between the Partnership and its Affiliates, including the General Partners. The
Company's filings with the Securities and Exchange Commission, including its
Annual Report on Form 10-K for the year ended December 31, 2003, contain
additional information concerning such risk factors. Actual results in the
future could differ materially from those described in any forward-looking
statements as a result of the risk factors set forth above, and the risk factors
described in the Annual Report.
-2-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENT OF NET ASSETS IN LIQUIDATION AT JUNE 30, 2004
AND
BALANCE SHEET AT DECEMBER 31, 2003
ASSETS
June 30, December 31,
2004 2003
------------ ------------
Participating Insured Mortgages ("PIMs")(Note 2) $ 12,719,458 $ 12,779,997
Mortgage-Backed Securities ("MBS")(Note 3 and 5) 930,004 1,216,717
------------ ------------
Total mortgage investments 13,649,462 13,996,714
Cash and cash equivalents 1,729,140 1,412,465
Interest receivable and other assets 95,128 98,711
------------ ------------
Total assets $ 15,473,730 $ 15,507,890
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 186,992 $ 99,330
------------ ------------
Partners' equity (deficit) (Note 4):
Limited Partners
(12,770,261 Limited Partner interests outstanding) 15,422,480 15,528,672
General Partners (187,239) (199,025)
Accumulated comprehensive income 51,497 78,913
------------ ------------
Total net assets in liquidation at June 30, 2004 and
total Partner's equity at December 31, 2003 $ 15,286,738 15,408,560
============ ------------
Total liabilities and Partners' equity $ 15,507,890
============
The accompanying notes are an integral
part of the financial statements.
-3-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Liquidation as of June 30, 2004)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues:
Interest income - PIMs:
Basic interest $ 819,594 $ 256,951 $1,074,795 $ 514,461
Interest income - MBS 18,748 269,827 39,720 453,805
Other interest income 3,709 11,357 7,617 26,942
---------- ---------- ---------- ----------
Total revenues 842,051 538,135 1,122,132 995,208
---------- ---------- ---------- ----------
Expenses:
Asset management fee to an affiliate 25,436 27,188 51,104 69,137
Expense reimbursements to affiliates 90,537 28,674 166,227 86,835
Estimated costs of liquidation (Note 1) 159,703 -- 159,703 --
General and administrative 35,682 39,279 64,667 82,980
---------- ---------- ---------- ----------
Total expenses 311,358 95,141 441,701 238,952
---------- ---------- ---------- ----------
Net income 530,693 442,994 680,431 756,256
Other comprehensive income:
Net decrease in unrealized gain on MBS (44,773) (17,962) (27,416) (1,147)
---------- ---------- ---------- ----------
Total comprehensive income $ 485,920 $ 425,032 $ 653,015 $ 755,109
========== ========== ========== ==========
Allocation of net income (Note 4):
Limited Partners $ 514,772 $ 429,704 $ 660,018 $ 733,568
========== ========== ========== ==========
Average net income per Limited
Partner interest (12,770,261
Limited Partner interests outstanding) $ .04 $ .04 $ .05 $ .06
========== ========== ========== ==========
General Partners $ 15,921 $ 13,290 $ 20,413 $ 22,688
========== ========== ========== ==========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(In Liquidation as of June 30, 2004)
For the Six Months
Ended June 30,
--------------------------
2004 2003
----------- -----------
Operating activities:
Net income $ 680,431 $ 756,256
Adjustments to reconcile net income to net cash
provided by operating activities:
Prepayment premium -- (235,918)
Changes in assets and liabilities:
Decrease in interest receivable and other assets 3,583 54,211
Increase (decrease) in liabilities 87,662 (11,475)
----------- -----------
Net cash provided by operating activities 771,676 563,074
----------- -----------
Investing activities:
Principal collections on PIMs 60,539 55,761
Principal collections on MBS including a prepayment
premium of $235,918 in 2003 259,297 8,654,350
----------- -----------
Net cash provided by investing activities 319,836 8,710,111
----------- -----------
Financing activities:
Quarterly distributions (774,837) (1,045,127)
Special distributions -- (8,172,903)
----------- -----------
Net cash used for financing activities (774,837) (9,218,030)
----------- -----------
Net increase in cash and cash equivalents 316,675 55,155
Cash and cash equivalents, beginning of period 1,412,465 1,209,070
----------- -----------
Cash and cash equivalents, end of period $ 1,729,140 $ 1,264,225
=========== ===========
Non cash activities:
Decrease in unrealized gain on MBS $ (27,416) $ (1,147)
=========== ===========
The accompanying notes are an integral
part of the financial statements.
-5-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(In Liquidation as of June 30, 2004)
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, 2003 for
additional information relevant to significant accounting policies
followed by the Partnership.
As a result of the payoff of the Harbor Club Apartments PIM on June 24,
2004, the Partnership is in the process of winding up its business, which
it expects to complete in the third quarter of 2004. The Partnership will
sell its remaining MBS and then make a Terminating Capital Transaction
distribution to the partners. In connection therewith, the Partnership has
changed its basis of accounting as of June 30, 2004 from the going-concern
basis to the liquidation basis of accounting. The liquidation basis of
accounting requires that assets and liabilities be stated at their
estimated net realizable value and that estimated costs of liquidating the
Partnership be provided to the extent that they are reasonably
determinable. The Partnership estimates that the costs to liquidate will
be approximately $160,000, which primarily relates to the remaining
general and administrative expenses to be incurred through the anticipated
liquidation of the Partnership in the third quarter of 2004.
In the opinion of the General Partners of the Partnership, the
accompanying unaudited financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the Partnership's financial position as of June 30, 2004, its results of
operations for the three and six months ended June 30, 2004 and 2003 and
its cash flows for the six months ended June 30, 2004 and 2003.
The results of operations for the three and six months ended June 30, 2004
are not necessarily indicative of the results which may be expected
through the anticipated liquidation in the third quarter of 2004. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this report.
2. PIMs
On June 24, 2004, the borrower of the Harbor Club Apartments PIM paid off
the Subordinated Promissory Note and the GNMA MBS. On June 24, 2004, the
Partnership received $565,000 which represents a partial return of the
interest rate rebate which had previously been recorded as a reduction in
basic interest. On July 15, 2004, the Partnership received $12,719,458
from the GNMA MBS related to Harbor Club. On July 28, 2004, the
Partnership paid a special distribution of $1.00 per Limited Partner
interest from the proceeds received.
3. MBS
At June 30, 2004, the Partnership's MBS portfolio had an amortized cost of
$878,507 and gross unrealized gains of $51,497. The portfolio has
maturities ranging from 2016 to 2024.
-6-
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
(In Liquidation as of June 30, 2004)
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended June 30,
2004 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------ ------------ ------------- ------------
Balance at December 31, 2003 $ 15,528,672 $ (199,025) $ 78,913 $ 15,408,560
Net income 660,018 20,413 -- 680,431
Quarterly distributions (766,210) (8,627) -- (774,837)
Change in unrealized gain on MBS -- -- (27,416) (27,416)
------------ ------------ ------------ ------------
Balance at June 30, 2004 $ 15,422,480 $ (187,239) $ 51,497 $ 15,286,738
============ ============ ============ ============
5. Subsequent Event
On July 15, 2004, the Partnership sold its remaining MBS portfolio for
$905,651, including accrued interest of $2,703. The gain realized from the
sale was $51,497.
At the time of the sale, the MBS portfolio had an amortized cost of
$851,451 and a face value of $885,507. After the sale, the Partnership
received $19,720 in additional face value from the July pass-through
payment and will receive an additional $7,539 from the August pass-through
payment.
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and accompanying notes contained in the Partnership's 2003
Annual Report on Form 10-K and in this report on Form 10-Q.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-Q constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the Partnership's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors include, among other
things, federal, state or local regulations; adverse changes in general economic
or local conditions; pre-payments of mortgages; uninsured losses and potential
conflicts of interest between the Partnership and its Affiliates, including the
General Partners.
Liquidity and Capital Resources
On June 24, 2004, the borrower of the Harbor Club Apartments PIM paid off the
Subordinated Promissory Note and the GNMA MBS. On June 24, 2004, the Partnership
received $565,000, which represents a partial return of the interest rate rebate
which had previously been recorded as a reduction in basic interest. On July 15,
2004, the Partnership received $12,719,458 from the GNMA MBS related to Harbor
Club. On July 28, 2004, the Partnership paid a special distribution of $1.00 per
Limited Partner interest from the proceeds received.
As a result of the payoff of the Harbor Club Apartments PIM, the Partnership is
in the process of winding up its business, which it expects to complete in the
third quarter of 2004 with a Terminating Capital Transaction distribution to the
partners. In connection therewith, the Partnership has changed its basis of
accounting as of June 30, 2004 from the going-concern basis to the liquidation
basis of accounting.
At June 30, 2004, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $1.7 million as well as interest earned on the
Partnership's cash and cash equivalents. The Partnership anticipates that these
sources will be adequate to provide the Partnership with sufficient liquidity to
meet its obligations during its liquidation and complete the Terminating Capital
Transaction.
On July 15, 2004, the Partnership sold its remaining MBS portfolio for $905,651,
including accrued interest of $2,703. The gain realized from the sale was
$51,497.
The proceeds from the sale of the MBS will be included with other amounts
available for distribution from the Terminating Capital Transaction and will be
distributed to the Limited Partners during the third quarter of 2004 in a final
liquidating distribution.
The Partnership is in the process of winding up its business and expects to make
a Terminating Capital Transaction distribution, as defined in the Partnership
Agreement, to the partners in the third quarter of 2004. Upon the occurrence of
a Terminating Capital Transaction, the Partnership Agreement provides that
losses from the Terminating Capital Transaction shall be allocated first to the
Limited Partners and General Partners to the extent of any then existing
positive account balances (or if the amount would be insufficient to reduce
those positive capital account balances to zero, then in proportion to any
positive account balances). The Advisor has estimated that the loss from the
Terminating Capital Transaction will be approximately $200,000. As of December
31, 2003, the General Partners had deficit account balances of approximately
$408,000 and the Limited Partners had positive account balances of approximately
$16,669,000. Therefore, all estimated losses from the Terminating Capital
Transaction will be allocated, for tax purposes, to the Limited Partners to
reduce their positive capital accounts. Amounts available for distribution from
the Terminating Capital Transaction will be distributed to the Limited Partners.
Upon the dissolution and termination of the Partnership, the General Partners
will contribute to the Partnership an amount equal to the remaining deficit
balance in their capital accounts. The General Partners have estimated that the
deficit balance will be approximately $417,000 which, after satisfaction of any
other obligations of the Partnership, will also be distributed to the Limited
Partners.
Critical Accounting Policies
The Partnership's critical accounting policy relates to the Partnership's
estimates included in its liquidation basis accounting statements. The
Partnership's policies are as follows:
The Partnership is in the process of winding up its business, which it expects
to complete in the third quarter of 2004. In connection therewith, the
Partnership has changed its basis of accounting as of June 30, 2004 from the
going-concern basis to the liquidation basis of accounting. The liquidation
basis of accounting requires that assets and liabilities be stated at their
estimated net realizable
-8-
value and that estimated costs of liquidating the Partnership be provided to the
extent that they are reasonably determinable. The Partnership estimates that the
costs to liquidate will be approximately $160,000, which primarily relates to
the remaining general and administrative expenses to be incurred through the
anticipated liquidation of the Partnership in the third quarter of 2004. This
amount has been included in the Partnership's liabilities at June 30, 2004.
Results of Operations
The Partnership's net income increased for the three months ending June 30, 2004
as compared to the same period ending June 30, 2003 primarily due to an increase
in basic interest on PIMs. This increase was partially offset by decreases in
MBS interest income and other interest income and an increase in expense
reimbursements to affiliates. The increase was also partially offset by the
recording of the estimated liquidation costs of the Partnership. Basic interest
on PIMs increased due to the partial return of the Harbor Club Apartments PIM
interest rate rebate. MBS interest income decreased due to the Signature Point
payoff in April 2003 and on-going principal collections on the single family
MBS. Other interest income decreased due to significantly lower average cash
balances available for short-term investing during the three months ended June
30, 2004 versus the three months ended June 30, 2003. Expense reimbursements to
affiliates increased primarily due to a change in the cost of services
associated with the wind-down of the Partnership's activities and anticipated
liquidation of the Partnership's assets. The recording of estimated liquidation
costs is due to the Partnership changing its basis of accounting from the
going-concern basis to the liquidation basis. Due to this change, the
Partnership recorded an estimate in the second quarter of the remaining general
and administrative expenses to be incurred through the anticipated liquidation
in the third quarter of 2004.
The Partnership's net income decreased during the six months ended June 30, 2004
as compared to the six months ended June 30, 2003 primarily due to decreases in
MBS interest income and other interest income and an increase in expense
reimbursements to affiliates. The decrease was also due to the recording of the
estimated liquidation costs of the Partnership. The decrease was partially
offset by an increase in basic interest on PIMs and decreases in asset
management fees and general and administrative expenses. MBS interest income
decreased due to the Signature Point payoff in April 2003 and on-going principal
collections on the single family MBS. Other interest income decreased primarily
due to interest received in the first quarter of 2003 from the Partnership's
distribution account. Expense reimbursements to affiliates increased primarily
due to a change in the cost of services associated with the wind-down of the
Partnership's activities and anticipated liquidation of the Partnership's
assets. The recording of estimated liquidation costs is due to the Partnership
changing its basis of accounting from the going-concern basis to the liquidation
basis. Due to this change, the Partnership recorded an estimate in the second
quarter of the remaining general and administrative expenses to be incurred
through the anticipated liquidation in September 2004. Basic interest on PIMs
increased due to the partial return of the Harbor Club Apartments PIM interest
rate rebate. Asset management fees decreased due to the decrease in the
Partnership's investments as a result of principal collection and payoffs.
General and administrative expense was greater during the first six months of
2003 primarily due to additional printing costs relating to the SEC filing and
legal costs associated with the Berkshire Income Realty, Inc. exchange offer.
Off Balance Sheet Arrangements
The Partnership has no off balance sheet arrangements as described in Item 303
(a) (4) (ii) of Regulation S-K and did not have any such arrangements during the
period covered by this report on Form 10-Q.
Contractual Obligations
The Partnership has no contractual obligations as contemplated by Item 303 (a)
(5) of Regulation S-K and did not have any such arrangements either during the
period covered by this report on Form 10-Q or during the Partnership's most
recent completed fiscal year.
-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 or the Federal Home Loan Mortgage Corporation ("FHLMC") 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 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.
At June 30, 2004, the Partnership includes in cash and cash equivalents
approximately $1.5 million of commercial paper, which is issued by entities with
a credit rating equal to one of the top two rating categories of a nationally
recognized statistical rating organization.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2004, 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. 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, Use of Proceeds and Issuer Purchases of Equity
Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(31.1) Senior Vice President Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(31.2) Chief Accounting Officer Certification 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: August 11, 2004
-12-