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, 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 04-3007489 (State or other jurisdiction of incorporation or organization) (IRS employer 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) 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 June 30, December 31, 2002 2001 ------------------ ------------------ Participating Insured Mortgages ("PIMs")(Note 2) $ 12,947,374 $ 27,762,795 Mortgage-Backed Securities and insured mortgage ("MBS")(Note 3) 10,865,520 11,407,452 ------------------ ------------------ Total mortgage investments 23,812,894 39,170,247 Cash and cash equivalents 1,703,750 1,900,744 Interest receivable and other assets 163,702 275,094 Prepaid acquisition fees and expenses, net of accumulated amortization of $991,739 and $955,545, respectively - 36,194 Prepaid participation servicing fees, net of accumulated amortization of $311,204 and $293,743, respectively 17,460 34,921 ------------------ ------------------ Total assets $ 25,697,806 $ 41,417,200 ================== ================== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 69,895 $ 17,877 ------------------ ------------------ Partners' equity (deficit) (Note 4): Limited Partners (12,770,261 Limited Partner interests outstanding) 25,680,840 41,486,071 General Partners (199,481) (217,863) Accumulated comprehensive income 146,552 131,115 ------------------ ------------------ Total Partners' equity 25,627,911 41,399,323 ------------------ ------------------ Total liabilities and Partners' equity $ 25,697,806 $ 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 For the Six Months Ended June 30, Ended June 30, ----------------------------------- ---------------------------------- 2002 2001 2002 2001 ------------- ------------ -------------- --------------- Revenues: Interest income - PIMs: Basic interest $ 259,121 $ 659,966 $ 621,798 $ 1,371,638 Participation Interest - 25,000 1,339,172 25,000 Interest income - MBS 203,107 225,173 411,342 457,859 Other interest income 9,665 30,340 41,972 58,898 ------------- ------------ -------------- -------------- Total revenues 471,893 940,479 2,414,284 1,913,395 ------------- ------------ -------------- -------------- Expenses: Asset management fee to an affiliate 44,406 82,829 98,284 169,471 Expense reimbursements to affiliates 26,817 24,987 46,081 46,345 Amortization of prepaid fees and expenses 23,208 52,072 53,655 135,635 General and administrative 59,592 33,935 79,157 51,734 ------------- ------------ -------------- -------------- Total expenses 154,023 193,823 277,177 403,185 ------------- ------------ -------------- -------------- Net income 317,870 746,656 2,137,107 1,510,210 Other comprehensive income: Net change in unrealized gain (loss) on MBS 17,550 (8,061) 15,437 (2,445) ------------- ------------ -------------- -------------- Total comprehensive income $ 335,420 $ 738,595 $ 2,152,544 $ 1,507,765 ============= ============ ============== ============== Allocation of net income (Note 4): Limited Partners $ 308,334 $ 724,257 $ 2,072,994 $ 1,464,904 ============= ============ ============== ============== Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .02 $ .05 $ .16 $ .11 ============= ============ ============== ============== General Partners $ 9,536 $ 22,399 $ 64,113 $ 45,306 ============= ============ ============== ============== 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, ---------------------------------------- 2002 2001 --------------- -------------- Operating activities: Net income $ 2,137,107 $ 1,510,210 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 53,655 135,635 Shared Appreciation Interest (1,004,379) (15,000) Changes in assets and liabilities: Decrease in interest receivable and other assets 111,392 41,448 Increase in liabilities 52,018 13,495 --------------- -------------- Net cash provided by operating activities 1,349,793 1,685,788 --------------- -------------- Investing activities: Principal collections on PIMs including Shared Appreciation Interest of $1,004,379 in 2002 and $15,000 in 2001 15,819,800 6,811,137 Principal collections on MBS 557,369 530,310 --------------- -------------- Net cash provided by investing activities 16,377,169 7,341,447 --------------- -------------- Financing activities: Quarterly distributions (2,088,956) (2,095,378) Special distribution (15,835,000) - --------------- -------------- Net cash used for financing activities (17,923,956) (2,095,378) --------------- -------------- Net increase (decrease) in cash and cash equivalents (196,994) 6,931,857 Cash and cash equivalents, beginning of period 1,900,744 1,910,212 --------------- -------------- Cash and cash equivalents, end of period $ 1,703,750 $ 8,842,069 =============== ============== Non cash activities: Increase (decrease) in Fair Value of MBS $ 15,437 $ (2,445) =============== ============== 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 June 30, 2002, its results of operations for the three and six months ended June 30, 2002 and 2001 and its cash flows for the six months ended June 30, 2002 and 2001. The results of operations for the three and six months ended June 30, 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 June 30, 2002, the Partnership's remaining PIM had a fair market value of approximately $13,744,414 and gross unrealized gains of approximately $797,040. 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 June 30, 2002, the Partnership's MBS portfolio had an amortized cost of $2,812,886 and gross unrealized gains of $146,552. At June 30, 2002, the Partnership's insured mortgage loan had an amortized cost of $7,906,082 and a gross unrealized gain of $330,474. The portfolio has maturities ranging from 2016 to 2035. The accompanying notes are an integral part of the financial statements. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the six months ended June 30, 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 2,072,994 64,113 - 2,137,107 Special Distribution (15,835,000) - - (15,835,000) Quarterly distributions (2,043,225) (45,731) - (2,088,956) Change in unrealized gain on MBS - - 15,437 15,437 ------------- ----------- ----------- -------------- Balance at June 30, 2002 $ 25,680,840 $ (199,481) $ 146,552 $ 25,627,911 ============= =========== ============ ============== 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 June 30, 2002, the Partnership had liquidity consisting of cash and cash equivalents of approximately $1.7 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 $0.08 per Limited Partner interest per quarter through the November 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 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 decreased for the three months ending June 30, 2002 as compared to the same period ending June 30, 2001. This decrease is due primarily to decreases in basic interest income on PIMs, interest income on MBS, other interest income and participation income and an increase in general and administrative expenses net of decreases in asset management fees and amortization expense. Basic interest income on PIMs decreased due to the payoff of the Royal Palm Place PIM in the first quarter of 2002 and the payoff of the Casa Marina PIM in June of 2001. Interest income on MBS decreased due to lower principal balances. Other interest income decreased due to lower average cash balances available for short-term investing and lower interest rates earned on those balances in the three-month period when compared to the same period in 2001. Participation income was greater in 2001 due to the payoff of the Casa Marina PIM mentioned above. 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 to the full recognition of prepaid fees and expenses associated with the Royal Palm Place PIM in April of 2001. General and administrative expense was higher in 2002 when compared to 2001 due to the overpayment of 2000 processing costs that were refunded in 2001. Net income increased for the six months ended June 30, 2002 as compared to the same period ending June 30, 2001 due primarily to an increase in participation income and decreases in asset management fees and amortization expense. This was partially offset by a decrease in basic interest income on PIMs and an increase in general and administrative expense. Participation income 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 to the full recognition of prepaid fees and expenses associated with the Royal Palm Place PIM in April of 2001. Basic interest income on PIMs decreased due to the payoff of the Royal Palm Place PIM mentioned above and the Casa Marina PIM in July of 2001. General and administrative expense was higher in 2002 when compared to 2001 due to the overpayment of 2000 processing costs that were refunded in 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 June 30, 2002, the Partnership includes in cash and cash equivalents approximately $1.4 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 June 30, 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 (a) Exhibits (99.1)Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99.2)Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002. (b) 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: August 13, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Krupp Insured Plus III Limited Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas Krupp, Co-Chariman (Principal Executive Officer), President and Director of Krupp Plus Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of June 30, 2002 (the last date of the period covered by the Report). / s / Douglas Krupp - -------------------------------- Douglas Krupp, Principal Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Krupp Insured Plus III Limited Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert A. Barrows, Chief Accounting Officer of Krupp Plus Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of June 30, 2002 (the last date of the period covered by the Report). / s / Robert A. Barrows - ----------------------------- Robert A. Barrows, Chief Accounting Officer
- Company Dashboard
- Filings
-
10-Q Filing
Krupp Insured Plus Iii Limited Partnership Inactive 10-Q2002 Q2 Quarterly report
Filed: 14 Aug 02, 12:00am