UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, December 31, 2001 2000 ------------------ ------------------ Participating Insured Mortgages ("PIMs")(Note 2) $ 27,812,086 $ 34,608,223 Mortgage-Backed Securities and insured mortgage ("MBS")(Note 3) 11,920,270 12,453,025 ------------------ ------------------ Total mortgage investments 39,732,356 47,061,248 Cash and cash equivalents 8,842,069 1,910,212 Interest receivable and other assets 286,606 328,054 Prepaid acquisition fees and expenses, net of accumulated amortization of $1,136,006 and $2,201,139, respectively 97,112 200,938 Prepaid participation servicing fees, net of accumulated amortization of $276,283 and $803,998, respectively 52,380 84,189 ------------------ ------------------ Total assets $ 49,010,523 $ 49,584,641 ================== ================== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 31,145 $ 17,650 ------------------ ------------------ Partners' equity (deficit) (Note 4): Limited Partners (12,770,261 Limited Partner interests outstanding) 49,081,753 49,660,074 General Partners (212,372) (205,525) Accumulated comprehensive income 109,997 112,442 ------------------ ------------------ Total Partners' equity 48,979,378 49,566,991 ------------------ ------------------ Total liabilities and Partners' equity $ 49,010,523 $ 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 For the Six Months Ended June 30, Ended June 30, --------------------------------------------------------------------------- 2001 2000 2001 2000 ------------- ------------ -------------- ------------- Revenues: Interest income - PIMs: Basic interest $ 659,966 $ 726,216 $ 1,371,638 $ 1,397,557 Participation Interest 25,000 - 25,000 - Interest income - MBS 225,173 241,402 457,859 492,416 Other interest income 30,340 41,116 58,898 125,430 ------------- ------------ -------------- ------------- Total revenues 940,479 1,008,734 1,913,395 2,015,403 ------------- ------------ -------------- ------------- Expenses: Asset management fee to an affiliate 82,829 88,408 169,471 177,186 Expense reimbursements to affiliates 24,987 25,686 46,345 46,358 Amortization of prepaid fees and expenses 52,072 95,017 135,635 190,035 General and administrative 33,935 80,720 51,734 94,059 -------------- ------------- ------------- -------------- Total expenses 193,823 289,831 403,185 507,638 -------------- ------------- -------------- -------------- Net income 746,656 718,903 1,510,210 1,507,765 Other comprehensive income: Net change in unrealized gain (loss) on MBS (8,061) (10,388) (2,445) (19,433) -------------- ------------ -------------- -------------- Total comprehensive income $ 738,595 $ 708,515 $ 1,507,765 $ 1,488,332 ============== ============= ============== ============== Allocation of net income (Note 4): Limited Partners $ 724,257 $ 697,336 $ 1,464,904 $ 1,462,532 ============== ============= ============== ============== Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .05 $ .05 $ .11 $ .11 ============== ============= ============== ============== General Partners $ 22,399 $ 21,567 $ 45,306 $ 45,233 ============== ============= ============== ============== The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, ----------------------------------------- 2001 2000 ---------------- --------------- Operating activities: Net income $ 1,510,210 $ 1,507,765 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 135,635 190,035 Shared Appreciation Interest (15,000) - Changes in assets and liabilities: Decrease in interest receivable and other assets 41,448 404,510 Increase (decrease) in liabilities 13,495 (9,774) ---------------- -------------- Net cash provided by operating activities 1,685,788 2,092,536 ---------------- -------------- Investing activities: Principal collections on PIMs including Shared Appreciation interest of $15,000 in 2001 6,811,137 250,554 Principal collections on MBS 530,310 307,799 ---------------- -------------- Net cash provided by investing activities 7,341,447 558,353 ---------------- -------------- Financing activities: Special distributions - (14,941,089) Quarterly distributions (2,095,378) (4,913,572) ---------------- -------------- Net cash used for financing activities (2,095,378) (19,854,661) ---------------- -------------- Net increase (decrease) in cash and cash equivalents 6,931,857 (17,203,772) Cash and cash equivalents, beginning of period 1,910,212 19,237,377 ---------------- -------------- Cash and cash equivalents, end of period $ 8,842,069 $ 2,033,605 ================ ============== Non cash activities: Decrease in Fair Value of MBS $ (2,445) $ (19,433) ================ ============== 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 June 30, 2001, its results of operations for the three and six months ended June 30, 2001 and 2000 and its cash flows for the six months ended June 30, 2001 and 2000. The results of operations for the three and six months ended June 30, 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 During June 2001, the Partnership received a payoff of the Casa Marina PIM in the amount of $6,727,016. In addition, the Partnership received $15,000 of Shared Appreciation Interest and $10,000 of Minimum Additional Interest upon the payoff of the underlying mortgage. On July 18, 2001, the Partnership paid a special distribution of $.53 per Limited Partner interest from the principal proceeds and Shared Appreciation received from Casa Marina. At June 30, 2001, the Partnership's PIM portfolio had a fair market value of approximately $28,750,599 and gross unrealized gains of approximately $938,513. The PIM portfolio has maturities ranging from 2006 to 2031. 3. MBS At June 30, 2001, the Partnership's MBS portfolio had an amortized cost of $3,851,045 and gross unrealized gains and losses of $110,242 and $245, respectively. At June 30, 2001, the Partnership's insured mortgage loan had an amortized cost of $7,959,228. The portfolio has maturities ranging from 2016 to 2035. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the six months ended June 30, 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 1,464,904 45,306 - 1,510,210 Quarterly distributions (2,043,225) (52,153) - (2,095,378) Change in unrealized gain on MBS - - (2,445) (2,445) ------------- ---------- ----------- -------------- Balance at June 30, 2001 $ 49,081,753 $ (212,372) $ 109,997 $ 48,979,378 ============= ========== ============ ==============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly 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
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. The General Partners periodically review the distribution rate to determine whether an adjustment is necessary based on projected future cash flows. Based on current projections, the General Partners believe that the Partnership will need to adjust the current distribution rate beginning with the February 2002 distribution. The General Partners will determine the new rate during the third quarter of 2001.
In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investments also may provide additional income through their participation features 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.
During June 2001, the Partnership received a payoff of the Casa Marina PIM in the amount of $6,727,016. In addition, the Partnership received $15,000 of Shared Appreciation Interest and $10,000 of Minimum Additional Interest upon the payoff of the underlying mortgage. On July 18, 2001, the Partnership paid a special distribution of $.53 per Limited Partner interest from the principal proceeds and Shared Appreciation received from Casa Marina.
The Partnership's only remaining PIM investments are backed by the first mortgage loans on Harbor Club and Royal Palm Place. Presently, the General Partners do not expect either 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. 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
Net income increased in the three months ended June 30, 2001 as compared to the same period ending June 30, 2000. This increase was primarily due to reductions in general and administrative expenses and amortization expense. General and administrative expenses were greater during the second quarter of 2000 due to higher processing costs. Amortization expense was higher during this time period due to the prepaid fees and expenses of the Casa Marina and Royal Palm Place PIMs being fully amortized by April 2001. The reductions in expenses were offset by a decrease in basic interest on PIMs due to the Casa Marina PIM payoff.
Net income increased in the six months ended June 30, 2001 as compared to the same period ending June 30, 2000. This increase was primarily due to reductions in general and administrative expenses and amortization expense. General and administrative expenses were greater during the first six months of 2000 due to higher processing costs. Amortization expense was higher during this time period due to the prepaid fees and expenses of the Casa Marina and Royal Palm Place PIMs being fully amortized by April 2001. The reductions in expenses were offset by decreases in basic interest on PIMs, MBS interest income and other interest income. The reduction in basic interest on PIMs is primarily due to the Casa Marina PIM payoff. MBS interest income declined due to ongoing prepayments in the MBS portfolio. Other interest income decreased due to significantly lower average cash balances available for short-term investing in the six month period ended June 30, 2001 versus the same period last year.
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. 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.
At June 30, 2001 the Partnership includes in cash and cash equivalents approximately $7.8 million held in a money market fund which invests in securities which are primarily direct obligations of the U.S. Government or securities issued by agencies and instrumentalities of the U.S. Government which may be guaranteed, supported or backed by the credit of the U.S. Government or agencies thereof.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At June 30, 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: / s / Robert A. Barrows ------------------------------------- Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus Corporation, a General Partner. DATE: August 3, 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 June 30, 2001 and the period from inception through June 30, 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. Six Months Inception Ended Through 6/30/01 6/30/01 -------- ----------- (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: ----------------------- Net Income on a GAAP basis $ 1,510 $ 139,552 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid fees and expenses and organization costs 136 16,345 MBS premium amortization - 92 Acquisition expenses paid from offering proceeds charged to operations - 184 Shared Appreciation Interest/prepayment premiums (15) (8,378) Gain on sale of MBS - (253) -------- ----------- Total Distributable Cash Flow ("DCF") $ 1,631 $ 147,542 ======== =========== Limited Partners Share of DCF $ 1,582 $ 143,116 ======== =========== Limited Partners Share of DCF per Unit $ .13 $ 11.21 (c) ======== =========== General Partners Share of DCF $ 49 $ 4,426 ======== =========== Net Proceeds from Capital Transactions: -------------------------------------- Principal collections on PIMs and PIM sale proceeds including Shared Appreciation Income/prepayment premiums $ 6,811 $ 149,058 Principal collections and sales proceeds on MBS (including prepayment premiums and gain on sale) 530 84,074 Reinvestment of MBS and PIM principal collections - (41,960) -------- ----------- Total Net Proceeds from Capital Transactions $ 7,341 $ 191,172 ======== =========== Cash available for distribution (DCF plus proceeds from Capital Transactions) $ 8,972 $ 338,714 ======== =========== Distributions: ------------- Limited Partners $ 8,812 (a) $ 332,954 (b) ======== =========== Limited Partners Average per Unit $ .69 (a) $ 26.07 (b)(c) ======== =========== General Partners $ 49 (a) $ 4,426 (b) ======== =========== Total Distributions $ 8,861 (a) $ 337,380 (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 August 2001. Also includes the special distribution of .53 per Limited Partner interest paid in July 2001 as a result of the Casa Marina PIM payoff. (b) Includes an estimate of the quarterly distribution to be paid in August 2001 and the special distribution of .53 per Limited Partner interest paid in July 2001 as a result of the Casa Marina PIM payoff. (c) Limited Partners average per Unit return of capital as of August 2001 is $14.86 [$26.07- $11.21]. 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.