UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-3007489
(IRS employer identification no.)
One Beacon Street, Boston, Massachusetts
(Address of principal executive offices)
02108
(Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP BALANCE SHEETS ASSETS March 31, December 31, 2001 2000 ---------------- --------------- Participating Insured Mortgages ("PIMs")(Note 2) $ 34,571,814 $ 34,608,223 Mortgage-Backed Securities and insured mortgage ("MBS")(Note 3) 12,289,376 12,453,025 ---------------- -------------- Total mortgage investments 46,861,190 47,061,248 Cash and cash equivalents 1,899,006 1,910,212 Interest receivable and other assets 330,611 328,054 Prepaid acquisition fees and expenses, net of accumulated amortization of $2,264,853 and $2,201,139, respectively 137,224 200,938 Prepaid participation servicing fees, net of accumulated amortization of $651,720 and $803,998, respectively 64,340 84,189 ---------------- -------------- Total assets $ 49,292,371 $ 49,584,641 ================ ============== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 5,313 $ 17,650 --------------- ------------- Partners' equity (deficit) (Note 4): Limited Partners (12,770,261 Limited Partner interests outstanding) 49,379,108 49,660,074 General Partners (210,108) (205,525) Accumulated comprehensive income 118,058 112,442 ---------------- ------------ Total Partners' equity 49,287,058 49,566,991 --------------- -------------- Total liabilities and Partners' equity $ 49,292,371 $ 49,584,641 =============== ============== The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Three Months Ended March 31, ----------------------------------- 2001 2000 ------------ ------------- Revenues: Interest income - PIMs: Basic interest $ 711,672 $ 671,341 Interest income - MBS 232,686 251,014 Other Interest income 28,558 84,314 ------------ ------------- Total revenues 972,916 1,006,669 ------------ ------------- Expenses: Asset management fee to an affiliate 86,642 88,778 Expense reimbursements to affiliates 21,358 20,672 Amortization of prepaid fees and expenses 83,563 95,018 General and administrative 17,799 13,339 ------------ ------------- Total expenses 209,362 217,807 ------------ ------------- Net income 763,554 788,862 Other Comprehensive income: Net change in unrealized loss/gain on MBS 5,616 (9,045) ------------ ------------- Total comprehensive income $ 769,170 $ 779,817 ============ ============= Allocation of net income (Note 4): Limited Partners $ 740,647 $ 765,196 ============ ============= Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .06 $ .06 ============ ============= General Partners $ 22,907 $ 23,666 ============ ============= The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, ----------------------------------- 2001 2000 ------------ ------------ Operating activities: Net income $ 763,554 $ 788,862 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 83,563 95,018 Changes in assets and liabilities: (Increase) decrease in interest receivable and other assets (2,557) 312,034 Decrease in liabilities (12,337) (6,690) ------------ ------------ Net cash provided by operating activities 832,223 1,189,224 ------------ ------------ Investing activities: Principal collections on PIMs 36,409 216,322 Principal collections on MBS 169,265 143,092 ------------ ------------- Net cash provided by investing activities 205,674 359,414 ------------ ------------ Financing activities: Quarterly distributions (1,049,103) (2,460,725) Special distributions - (14,941,089) ------------ ------------ Net cash used for financing activities (1,049,103) (17,401,814) ------------ ------------- Net decrease in cash and cash equivalents (11,206) (15,853,176) Cash and cash equivalents, beginning of period 1,910,212 19,237,377 ------------ ------------- Cash and cash equivalents, end of period $ 1,899,006 $ 3,384,201 ============ ============= Non cash activities: Increase (decrease) in Fair Value of MBS $ 5,616 $ (9,045) ============ ============= The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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, 2000 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 March 31, 2001 and its results of operations and cash flows for the three months ended March 31, 2001 and 2000.
The results of operations for the three months ended March 31, 2001 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 March 31, 2001, the Partnership’s PIM portfolio has a fair market value of approximately $35,633,510 and gross unrealized gains of approximately $1,061,696. The PIM portfolio has maturities ranging from 2006 to 2031.
3. MBS
At March 31, 2001, the Partnership’s MBS portfolio has an amortized cost of $4,199,412 and gross unrealized gains and losses of $118,717 and $659, respectively. At March 31, 2001, the Partnership’s insured mortgage loan has an amortized cost of $7,971,906. The portfolio has maturities ranging from 2016 to 2035.
4. Changes in Partners' Equity
A summary of changes in Partners’ Equity for the three months ended March 31, 2001 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity Balance at December 31, 2000 $ 49,660,074 $ (205,525) $ 112,442 $ 49,566,991 Net income 740,647 22,907 - 763,554 Quarterly distributions (1,021,613) (27,490) - (1,049,103) Change in unrealized gain on MBS - - 5,616 5,616 ------------- ----------- ------------ --------------- Balance at March 31, 2001 $ 49,379,108 $ (210,108) $ 118,058 $ 49,287,058 ============= ============ ============ ===============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------
Liquidity and Capital Resources
The most significant demands on the Partnership's liquidity are the regular quarterly distributions paid to investors, which are approximately $1.0 million each quarter. Funds for 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. At this time the General Partners have determined that the Partnership can maintain its current distribution rate of $.08 per Limited Partner interest per quarter.
In addition to providing insured or 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 meet certain criteria.
The Partnership's only remaining PIM investments are backed by the first mortgage loans on Casa Marina, Harbor Club and Royal Palm Place. Presently, the General Partners do not expect any of these properties to pay the Partnership any participation interest or to be sold or refinanced during 2001. However, if favorable market conditions provide the borrowers an opportunity to sell their properties, there are no contractual obligations remaining that would prevent a prepayment of the underlying first mortgages. Whether the Partnership receives any participation interest as the result of a sale depends on the value of the property as determined by the sale price. Casa Marina, located in North Miami, is a forty-year old property where the costs of maintenance, repairs and replacements have escalated as the property has aged. Occupancy generally hovers in the low 90% range, and the property generates sufficient cash flow for adequate maintenance but not enough to provide for major capital improvements or any participation interest. The Borrower informed the Partnership that the property was marketed for sale during 2000 without success. Harbor Club operates successfully in Ann Arbor, Michigan, which is a very competitive market with many newer apartment properties. Although Harbor Club has maintained occupancy rates in the mid 90% range for the past two years, most cash flow generated by the property is used for capital replacements and improvements that help it maintain its strong market position. Royal Palm Place operates under a long term restructure program. As an on going result of the Partnership's 1995 agreement to modify the payment terms of the Royal Palm Place PIM, the Partnership will receive basic interest only payments on the Fannie Mae MBS at the rate of 8.375% per annum during 2001. Thereafter, the interest rate will range from 8.375% to 8.775% per annum through the maturity of the first mortgage in 2006.
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.
Results of Operations
The following discussion relates to the operation of the Partnership during the three months ended March 31, 2001 and 2000.
Net income decreased during 2001 as compared to 2000 due primarily to lower other interest income net of greater basic interest on PIMs. The decrease in other interest income is primarily due to the Partnership having lower average short-term investment balances during the three months ended March 31, 2001 when compared to the corresponding period in 2000. Basic interest on PIMs increased due to an increase in the interest rate on the Royal Palm Place PIM as specified under its long term restructure program.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by the Government National Mortgage Association ("GNMA"), Fannie Mae, the Federal Home Loan Mortgage Corporation ("FHLMC") or the United States Department of Housing and Urban Development ("HUD") and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represent interests in pooled mortgages insured by HUD. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government.
At March 31, 2001, the Partnership includes in cash and cash equivalents approximately $1.6 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At March 31, 2001, the Partnerships PIMs and MBS comprise the majority of the Partnership's assets. As such decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold all of its investments to expected maturity.
The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, when setting regular distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they mature.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Krupp Insured Plus-III Limited Partnership (Registrant) BY: ----------------------------------------- Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus Corporation, a General Partner. DATE: April 27, 2001
Unaudited Distributable Cash Flow and Net Cash Proceeds from Capital Transactions Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions as defined in Section 17 of the Partnership Agreement (on a GAAP basis) and the source of cash distributions for the quarter ended March 31, 2001 and the period from inception through March 31, 2001. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Inception Quarter Ended Through 3/31/01 3/31/01 -------- ----------- (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: ----------------------- Net Income on a GAAP basis $ 764 $ 138,806 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid expenses, fees and organization costs 84 16,293 MBS premium amortization - 92 Acquisition expenses paid from offering proceeds charged to operations - 184 Shared Appreciation Interest/prepayment premiums - (8,363) Gain on sale of MBS - (253) -------- ----------- Total Distributable Cash Flow ("DCF") $ 848 $ 146,759 ======== =========== Limited Partners Share of DCF $ 822 $ 142,356 ======== =========== Limited Partners Share of DCF per Unit $ .07 $ 11.15(c) ======== =========== General Partners Share of DCF $ 26 $ 4,403 ======== =========== Net Proceeds from Capital Transactions: -------------------------------------- Principal collections and prepayments (including Shared Appreciation Interest and prepayment premiums) on PIMs $ 36 $ 142,283 Principal collections and sales proceeds on MBS (including prepayment premiums and gain on sale) 169 83,713 Reinvestment of MBS and PIM principal collections - (41,960) ------- ----------- Total Net Proceeds from Capital Transactions $ 205 $ 184,036 ======== =========== Cash available for distribution (DCF plus proceeds from Capital Transactions) $ 1,053 $ 330,795 ======== =========== Distributions: ------------- Limited Partners $ 1,022 (a) $ 325,164 (b) ======== =========== Limited Partners Average per Unit $ .08 (a) $ 25.46 (b)(c) ======= =========== General Partners $ 26 (a) $ 4,403 (b) ======= =========== Total Distributions $ 1,048 (a) $ 329,567 (b) ======= =========== (a) Represents all distributions paid in 2001 except the February 2001 quarterly distribution and includes an estimate of the distribution to be paid in May 2001. (b) Includes an estimate of the quarterly distribution to be paid in May 2001. (c) Limited Partners average per Unit return of capital as of May 2001 is $14.31 [$25.46 - $11.15]. Return of capital represents that portion of distributions which is not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs.