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 September 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 September 30, December 31, 2001 2000 ------------------ ------------------ Participating Insured Mortgages ("PIMs")(Note 2) $ 27,787,694 $ 34,608,223 Mortgage-Backed Securities and insured mortgage ("MBS")(Note 3) 11,716,668 12,453,025 ------------------ ------------------ Total mortgage investments 39,504,362 47,061,248 Cash and cash equivalents 2,100,929 1,910,212 Interest receivable and other assets 275,140 328,054 Prepaid acquisition fees and expenses, net of accumulated amortization of $1,166,464 and $2,201,139, respectively 66,653 200,938 Prepaid participation servicing fees, net of accumulated amortization of $285,014 and $803,998, respectively 43,651 84,189 ------------------ ------------------ Total assets $ 41,990,735 $ 49,584,641 ================== ================== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 150,198 $ 17,650 ------------------ ------------------ Partners' equity (deficit) (Note 4): Limited Partners (12,770,261 Limited Partner interests outstanding) 41,886,991 49,660,074 General Partners (217,480) (205,525) Accumulated comprehensive income 171,026 112,442 ------------------ ------------------ Total Partners' equity 41,840,537 49,566,991 ------------------ ------------------ Total liabilities and Partners' equity $ 41,990,735 $ 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 Nine Months Ended September 30, Ended September 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 ------------- ------------ -------------- ------------- Revenues: Interest income - PIMs: Basic interest $ 569,759 $ 670,005 $ 1,941,397 $ 2,067,562 Participation interest - - 25,000 - Interest income - MBS 221,734 237,738 679,593 730,154 Other interest income 28,960 31,490 87,858 156,920 ------------- ------------ -------------- ------------- Total revenues 820,453 939,233 2,733,848 2,954,636 ------------- ------------ -------------- ------------- Expenses: Asset management fee to an affiliate 74,621 89,020 244,092 266,206 Expense reimbursements to affiliates 24,987 25,686 71,332 72,044 Amortization of prepaid fees and expenses 39,188 95,017 174,823 285,052 General and administrative 68,217 64,923 119,951 158,982 -------------- ------------- ------------- -------------- Total expenses 207,013 274,646 610,198 782,284 -------------- ------------- -------------- -------------- Net income 613,440 664,587 2,123,650 2,172,352 Other comprehensive income: Net change in unrealized gain on MBS 61,029 43,634 58,584 24,201 -------------- ------------ -------------- -------------- Total comprehensive income $ 674,469 $ 708,221 $ 2,182,234 $ 2,196,553 ============== ============= ============== ============== Allocation of net income (Note 4): Limited Partners $ 595,036 $ 644,649 $ 2,059,940 $ 2,107,181 ============== ============= ============== ============== Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .05 $ .06 $ .16 $ .17 ============== ============= ============== ============== General Partners $ 18,404 $ 19,938 $ 63,710 $ 65,171 ============== ============= ============== ============== The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, ---------------------------------------- 2001 2000 ---------------- -------------- Operating activities: Net income $ 2,123,650 $ 2,172,352 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 174,823 285,052 Shared Appreciation Interest (15,000) - Changes in assets and liabilities: Decrease in interest receivable and other assets 52,914 408,545 Increase (decrease) in liabilities 132,548 (4,887) ---------------- -------------- Net cash provided by operating activities 2,468,935 2,861,062 ---------------- -------------- Investing activities: Principal collections on PIMs including Shared Appreciation Interest of $15,000 in 2001 6,835,529 285,497 Principal collections on MBS 794,941 481,585 ---------------- -------------- Net cash provided by investing activities 7,630,470 767,082 ---------------- -------------- Financing activities: Special distributions (6,768,186) (14,941,089) Quarterly distributions (3,140,502) (5,959,603) ---------------- -------------- Net cash used for financing activities (9,908,688) (20,900,692) ---------------- -------------- Net increase (decrease) in cash and cash equivalents 190,717 (17,272,548) Cash and cash equivalents, beginning of period 1,910,212 19,237,377 ---------------- -------------- Cash and cash equivalents, end of period $ 2,100,929 $ 1,964,829 ================ ============== Non cash activities: Increase in Fair Value of MBS $ 58,584 $ 24,201 ================ ============== 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 September 30, 2001, its results of operations for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 2001 and 2000. The results of operations for the three and nine months ended September 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 September 30, 2001, the Partnership's PIM portfolio had a fair market value of $29,113,702 and gross unrealized gains of $1,326,008. The PIM portfolio had maturities ranging from 2006 to 2031. 3. MBS At September 30, 2001, the Partnership's MBS portfolio had an amortized cost of $3,599,330 and gross unrealized gains of $171,026. At September 30, 2001, the Partnership's insured mortgage loan had an amortized cost of $7,946,312. The portfolio had maturities ranging from 2016 to 2035. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the nine months ended September 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 2,059,940 63,710 - 2,123,650 Special distributions (6,768,186) - - (6,768,186) Quarterly distributions (3,064,837) (75,665) - (3,140,502) Change in unrealized gain on MBS - - 58,584 58,584 ---------------- ------------ ------------- -------------- Balance at September 30, 2001 $ 41,886,991 $ (217,480) $ 171,026 $ 41,840,537 ================ ============ ============= ==============
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 ResourcesThe 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 fourth 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. 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. The borrower on the Royal Palm Place PIM has notified the General Partners of his intention to market the property for sale, but it is unlikely that any transaction will occur prior to the end of the year. Whether the Partnership receives any participation interest as the result of a sale or refinance depends on the value of the property at that time. 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. Although occupancy at Royal Palm averaged in the mid 90% range through 2000 and 2001, it faces significant competition from neighboring properties that have changed ownership and benefited from new capital investment in exterior and interior renovations.
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 OperationsNet income decreased for the three months ended September 30, 2001 as compared to the same period ending September 30, 2000. This decrease was primarily due to decreases in basic interest on PIMs and MBS interest income net of decreases in asset management fees and amortization expense. Basic interest income on PIMs decreased primarily due to the payoff of the Casa Marina PIM in the second quarter of 2001. This decrease was partially offset by an increase in the interest rate for the Royal Palm Place PIM in 2001as specified in the workout agreement. MBS interest income decreased due to principal collections reducing the MBS investment portfolio. Asset management fees decreased due to the decline in the asset base. Amortization expense decreased due primarily to the full amortization of the prepaid expenses relating to the Casa Marina and Royal Palm PIMs in April of 2001.
Net income decreased for the nine months ended September 30, 2001 as compared to the same period ending September 30, 2000. This decrease was primarily due to decreases in basic interest income on PIMs, MBS interest income and other interest income net of decreases in asset management fees, amortization expense and general and administrative expenses. Basic interest income on PIMs decreased primarily due to the payoff of the Casa Marina PIM in the second quarter of 2001. This decrease was partially offset by an increase in the interest rate for the Royal Palm Place PIM as specified under the workout agreement. MBS interest income decreased due to principal collections reducing the MBS investment portfolio. Other interest income decreased due to lower average interest rates earned on cash balances available for short-term investing during the nine months ending September 30, 2001 as compared to the same period last year. Asset management fees decreased due to the decline in the asset base. Amortization expense decreased due primarily to the full amortization of the prepaid expenses relating to the Case Marina and Royal Palm PIMs in April of 2001. General and administrative expenses decreased due to lower processing costs during the nine months ended September 30, 2001 as compared to the same period ending September 30, 2000.
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 September 30, 2001 the Partnership includes in cash and cash equivalents approximately $1.7 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 RiskThe 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, 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: November 2, 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 September 30, 2001 and the period from inception through September 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. Nine Months Inception Ended Through 9/30/01 9/30/01 -------- ------------ (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: ----------------------- Net Income on a GAAP basis $ 2,124 $ 140,166 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid fees and expenses and organization costs 175 16,384 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") $ 2,284 $ 148,195 ======== =========== Limited Partners Share of DCF $ 2,215 $ 143,749 ======== =========== Limited Partners Share of DCF per Unit $ .18 $ 11.26 (c) ======== =========== General Partners Share of DCF $ 69 $ 4,446 ======== =========== Net Proceeds from Capital Transactions: -------------------------------------- Principal collections on PIMs and PIM sale proceeds including Shared Appreciation Income/prepayment premiums $ 6,836 $ 149,083 Principal collections and sales proceeds on MBS (including prepayment premiums and gain on sale) 795 84,339 Reinvestment of MBS and PIM principal collections - (41,960) -------- ----------- Total Net Proceeds from Capital Transactions $ 7,631 $ 191,462 ======== =========== Cash available for distribution (DCF plus proceeds from Capital Transactions) $ 9,915 $ 339,657 ======== =========== Distributions: ------------- Limited Partners $ 9,833 (a) $ 333,975 (b) ======== =========== Limited Partners Average per Unit $ .77 (a) $ 26.15 (b)(c) ======== =========== General Partners $ 69 (a) $ 4,446 (b) ======== =========== Total Distributions $ 9,902 (a) $ 338,421 (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 November 2001. (b) Includes an estimate of the quarterly distribution to be paid in November 2001. (c) Limited Partners average per Unit return of capital as of November 2001 is $14.89 [$26.15 - $11.26]. 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.