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, 2002
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. 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; prepayments of mortgages; failure of borrowers to pay participation interests due to poor operating results of properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Partnership and its Affiliates, including the General Partners. The Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2001, 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.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP BALANCE SHEETS ASSETS March 31, December 31, 2002 2001 --------------- -------------- Participating Insured Mortgages ("PIMs")(Note 2) $ 12,973,317 $ 27,762,795 Mortgage-Backed Securities and insured mortgage ("MBS")(Note 3) 11,082,308 11,407,452 --------------- -------------- Total mortgage investments 24,055,625 39,170,247 Cash and cash equivalents 2,100,457 1,900,744 Interest receivable and other assets 166,302 275,094 Prepaid acquisition fees and expenses, net of accumulated amortization of $977,261 and $955,545, respectively 14,478 36,194 Prepaid participation servicing fees, net of accumulated amortization of $302,474 and $293,743, respectively 26,190 34,921 --------------- -------------- Total assets $ 26,363,052 $ 41,417,200 =============== ============== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 23,590 $ 17,877 --------------- -------------- Partners' equity (deficit) (Note 4): Limited Partners (12,770,261 Limited Partner interests outstanding) 26,394,118 41,486,071 General Partners (183,658) (217,863) Accumulated comprehensive income 129,002 131,115 --------------- -------------- Total Partners' equity 26,339,462 41,399,323 --------------- -------------- Total liabilities and Partners' equity $ 26,363,052 $ 41,417,200 =============== ============== 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, ----------------------------------- 2002 2001 ------------ ------------- Revenues: Interest income - PIMs: Basic interest $ 362,677 $ 711,672 Participation interest 1,339,172 - Interest income - MBS 208,235 232,686 Other interest income 32,307 28,558 ------------ ------------- Total revenues 1,942,391 972,916 ------------ ------------- Expenses: Asset management fee to an affiliate 53,878 86,642 Expense reimbursements to affiliates 19,264 21,358 Amortization of prepaid fees and expenses 30,447 83,563 General and administrative 19,565 17,799 ------------ ------------- Total expenses 123,154 209,362 ------------ ------------- Net income 1,819,237 763,554 Other comprehensive income: Net change in unrealized gain on MBS (2,113) 5,616 ------------ ------------- Total comprehensive income $ 1,817,124 $ 769,170 ============ ============= Allocation of net income (Note 4): Limited Partners $ 1,764,660 $ 740,647 ============ ============= Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ 0.14 $ .06 ============ ============= General Partners $ 54,577 $ 22,907 ============ ============= 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, ------------------------------------ 2002 2001 ------------ -------------- Operating activities: Net income $ 1,819,237 $ 763,554 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 30,447 83,563 Shared Appreciation Interest (1,004,379) - Changes in assets and liabilities: Decrease (increase) in interest receivable and other assets 108,792 (2,557) Increase (decrease) in liabilities 5,713 (12,337) ------------ -------------- Net cash provided by operating activities 959,810 832,223 ------------ -------------- Investing activities: Principal collections on PIMs including Shared Appreciation Interest of $1,004,379 in 2002. 15,793,857 36,409 Principal collections on MBS 323,031 169,265 ------------ -------------- Net cash provided by investing activities 16,116,888 205,674 ------------ -------------- Financing activities: Quarterly distributions (1,041,985) (1,049,103) Special distributions (15,835,000) - ------------ -------------- Net cash used for financing activities (16,876,985) (1,049,103) ------------ -------------- ------------ - Net increase (decrease) in cash and cash equivalents 199,713 (11,206) Cash and cash equivalents, beginning of period 1,900,744 1,910,212 ------------ -------------- Cash and cash equivalents, end of period $ 2,100,457 $ 1,899,006 ============ ============== Non cash activities: Increase (decrease) in Fair Value of MBS $ (2,113) $ 5,616 ============ ============== 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 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, 2001 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, 2002 and its results of operations and cash flows for the three months ended March 31, 2002 and 2001. The results of operations for the three months ended March 31, 2002 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, 2002, the Partnership's remaining PIM had a fair market value of approximately $13,654,416 and gross unrealized gains of approximately $681,099. The PIM matures in 2031. The Partnership received a prepayment of the Royal Palm Place PIM. On January 2, 2002, the Partnership received $1,004,379 of Shared Appreciation Interest and $334,793 of Minimum Additional Interest. On February 25, 2002, the Partnership received $14,764,062 representing the principal proceeds on the first mortgage. On March 19, 2002, the Partnership paid a special distribution of $1.24 per Limited Partner interest from the principal proceeds and Shared Appreciation Interest received. 3. MBS At March 31, 2002, the Partnership's MBS portfolio had an amortized cost of $3,033,562 and gross unrealized gains of $129,002. At March 31, 2002, the Partnership's insured mortgage loan had an amortized cost of $7,919,744. 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, 2002 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity Balance at December 31, 2001 $ 41,486,071 $ (217,863) $ 131,115 $ 41,399,323 Net income 1,764,660 54,577 - 1,819,237 Special distributions (15,835,000) - - (15,835,000) Quarterly distributions (1,021,613) (20,372) - (1,041,985) Change in unrealized gain on MBS - - (2,113) (2,113) ------------- ------------ ------------ -------------- Balance at March 31, 2002 $ 26,394,118 $ (183,658) $ 129,002 $ 26,339,462 ============= ============ ============ ============== 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 Form 10-Q constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Partnership's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, federal, state or local regulations; adverse changes in general economic or local conditions; pre-payments of mortgages; failure of borrowers to pay participation interests due to poor operating results at properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Partnership and its Affiliates, including the General Partners. Liquidity and Capital Resources At March 31, 2002, the Partnership had liquidity consisting of cash and cash equivalents of approximately $2.1 million as well as the cash flow provided by its investments in the remaining PIM and MBS. The Partnership anticipates that these sources will be adequate to provide the Partnership with sufficient liquidity to meet its obligations as well as to provide distributions to its investors. The most significant demand on the Partnership's liquidity is the quarterly distributions paid to investors, which are approximately $1.0 million. Funds for the quarterly distributions come from the monthly principal and basic interest payments received on the remaining PIM and MBS, the principal prepayments of MBS and interest earned on the Partnership's cash and cash equivalents. The portion of distributions attributable to the principal collections and cash reserves reduces the capital resources of the Partnership. As the capital resources decrease, the total cash flows to the Partnership 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. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions. To the extent that quarterly distributions do not fully utilize the cash available for distributions and cash balances increase, the General Partners may adjust the distribution rate or distribute such funds through a special distribution. Based on current projections, the General Partners have determined that the Partnership can maintain its current distribution rate of $.08 per Limited Partner interest per quarter through the August distribution. The Partnership received a prepayment of the Royal Palm Place PIM. On January 2, 2002, the Partnership received $1,004,379 of Shared Appreciation Interest and $334,793 of Minimum Additional Interest. On February 25, 2002, the Partnership received $14,764,062 representing the principal proceeds on the first mortgage. On March 19, 2002, the Partnership paid a special distribution of $1.24 per Limited Partner interest from the principal proceeds and Shared Appreciation Interest received. In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's remaining PIM investment also may provide additional income through a participation interest in the underlying property. The Partnership may receive a share in any operating cash flow that exceeds debt service obligations and capital needs or a share in any appreciation in value when the property is sold or refinanced. However, this participation is neither guaranteed nor insured, and it is dependent upon whether property operations or its terminal value meet certain criteria. The Partnership's only remaining PIM investment is backed by the first mortgage loan on Harbor Club. Presently, the General Partners do not expect Harbor Club to pay the Partnership any participation interest or to be sold or refinanced during 2002. However, if favorable market conditions provide the borrower an opportunity to sell the property, there are no contractual obligations remaining that would prevent a prepayment of the underlying first mortgage. 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 Partnership has the option to call its remaining PIM by accelerating the maturity of the loan. The Partnership will determine the merits of exercising the call option as economic conditions warrant. Such factors as the condition of the asset, local market conditions, the interest rate environment and availability of financing will affect this decision. Critical Accounting Policy The Partnership's critical accounting policy relates primarily to revenue recognition related to the participation feature of the Partnership's PIM investments. The Partnership's policy is as follows: Basic interest on PIMs is recognized based on the stated coupon rate of the GNMA or Fannie Mae MBS. The Partnership recognizes interest related to the participation features when the amount becomes fixed and the transaction that gives rise to such amount is consummated. Results of Operations Net income increased for the first quarter of 2002 as compared to the same period in 2001 due primarily to an increase in participation interest and decreases in asset management fees and amortization expense. This was partially offset by a decrease in basic interest income on PIMs. Participation interest increased due to the payoff of the Royal Palm Place PIM in the first quarter of 2002. Asset management fees decreased due to the decline in the Partnership's asset base as a result of principal collections and prepayments. Amortization expense decreased due primarily to the full recognition of prepaid fees and expenses associated with the Royal Palm Place PIM in April of 2001. 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 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, 2002, the Partnership includes in cash and cash equivalents approximately $1.9 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, 2002, the Partnership's remaining PIM and MBS comprise the majority of the Partnership's assets. Decreases in interest rates may accelerate the prepayment of the Partnership's investments. 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 its remaining PIM, the Partnership continues to monitor the borrower for any indication of a prepayment. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in 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 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: May 1, 2002 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, 2002 and the period from inception through March 31, 2002. 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 3/31/02 3/31/02 --------- ------------ (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: ----------------------- Net Income on a GAAP basis $ 1,819 $ 142,624 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid expenses, fees and organization costs 30 16,454 MBS premium amortization - 92 Acquisition expenses paid from offering proceeds charged to operations - 184 Shared Appreciation Interest/prepayment premiums (1,004) (9,382) Gain on sale of MBS - (253) -------- ------------ Total Distributable Cash Flow ("DCF") $ 845 $ 149,719 ======== ============ Limited Partners Share of DCF $ 819 $ 145,227 ======== ============ Limited Partners Share of DCF per Unit $ 0.06 $ 11.37 (c) ======== ============ General Partners Share of DCF $ 26 $ 4,492 ======== ============ Net Proceeds from Capital Transactions: -------------------------------------- Principal collections and prepayments (including Shared Appreciation Interest and prepayment premiums) on PIMs $ 15,794 $ 164,901 Principal collections and sales proceeds on MBS (including prepayment premiums and gain on sale) 323 84,931 Reinvestment of MBS and PIM principal collections - (41,960) -------- ----------- Total Net Proceeds from Capital Transactions $ 16,117 $ 207,872 ======== =========== Cash available for distribution (DCF plus proceeds from Capital Transactions) $ 16,962 $ 357,591 ======== =========== Distributions: ------------- Limited Partners $ 16,856 (a) $ 351,853 (b) ======== =========== Limited Partners Average per Unit $ 1.32 (a) $ 27.55(b)(c) ======== =========== General Partners $ 26 (a) $ 4,492 (b) ======== =========== Total Distributions $ 16,882 (a) $ 356,345 (b) ======== =========== (a) Represents all distributions paid in 2002 except the February 2002 quarterly distribution and includes an estimate of the distribution to be paid in May 2002. (b) Includes an estimate of the quarterly distribution to be paid in May 2002. (c) Limited Partners average per Unit return of capital as of May 2002 is $16.18 [$27.55 - $11.37]. 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.