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 THEx
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip Code)
(617) 423-2233
(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,
1996 1995
Participating Insured Mortgages ("PIMs")
(Note 2) $151,043,449 $151,465,652
Mortgage-Backed Securities and insured
mortgages ("MBS")(Note 3) 34,185,042 36,693,963
Total mortgage investments 185,228,491 188,159,615
Cash and cash equivalents 4,511,531 3,433,885
Interest receivable and other assets 1,284,605 1,924,402
Prepaid acquisition expenses and fees, net of
accumulated amortization of $6,681,531 and
$6,091,012, respectively 5,649,532 6,240,051
Prepaid participation servicing fees, net of
accumulated amortization of $2,270,498 and
$2,084,200, respectively 1,816,034 2,002,332
Total assets $198,490,193 $201,760,285
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 9,019 $ 14,756
Partners' equity (deficit) (Note 4):
Limited Partners 198,448,621 200,575,459
(12,770,261 Limited Partner interests
outstanding)
General Partners (131,618) (102,556)
Unrealized gain on MBS 164,171 1,272,626
Total Partners' equity 198,481,174 201,745,529
Total liabilities and Partners' equity $198,490,193 $201,760,285
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Revenues:
Interest income - PIMs:
Base interest $2,916,924 $3,095,380 $5,837,998 $6,139,329
Participation interest - 435,077 - 435,077
Interest income - MBS 684,368 727,278 1,382,770 1,444,302
Interest income - other 55,176 53,329 102,346 100,333
Total revenues 3,656,468 4,311,064 7,323,114 8,119,041
Expenses:
Asset management fee to
an affiliate 345,779 352,879 693,281 703,117
Expense reimbursements to
affiliates 38,912 50,142 85,897 100,916
Amortization of prepaid expenses
and fees 388,408 405,609 776,817 811,219
General and administrative 22,534 49,588 60,666 79,823
Total expenses 795,633 858,218 1,616,661 1,695,075
Net income $2,860,835 $3,452,846 $5,706,453 $6,423,966
Allocation of net income (Note 4):
Limited Partners $2,775,010 $3,349,261 $5,535,25 $6,231,247
Average net income per Limited
Partner interest (12,770,261
Limited Partner interests
outstanding) $ .21 $ .26 $ .43 $
.49
General Partners $ 85,825 $ 103,585 $ 171,194 $ 192,719
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,
1996 1995
Operating activities:
Net income $ 5,706,453 $ 6,423,966
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid expenses and fees 776,817 811,219
Changes in assets and liabilities:
Decrease in interest receivable and other assets 639,797 118,939
Increase (decrease) in liabilities (5,737) 8,308
Net cash provided by operating activities 7,117,330 7,362,432
Investing activities:
Principal collections on PIMs 422,203 447,829
Principal collections on MBS 1,400,466 855,780
Investment in MBS - (312,391)
Net cash provided by investing activities 1,822,669 991,218
Financing activity:
Distributions (7,862,353) (7,864,182)
Net increase in cash and cash equivalents 1,077,646 489,468
Cash and cash equivalents, beginning of period 3,433,885 3,257,180
Cash and cash equivalents, end of period $ 4,511,531 $ 3,746,648
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, 1995 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, 1996, its
results of operations for the three and six months ended June 30, 1996
and 1995, and its cash flows for the six months ended June 30, 1996 and
1995.
The results of operations for the three and six months ended June 30,
1996 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 May 1996, the Partnership entered into an agreement with the
borrower of the Sundance Apartments PIM that reduces the interest paid
monthly by the borrower by 1% per annum and modifies the participation
features. In addition, under the modified terms, the borrower may
prepay the first mortgage loan without incurring any prepayment penalty
and will not have to pay any additional interest accumulated prior to
the modification date. Under the agreement, the Partnership will be
entitled to 25% of the surplus cash generated by the operations of the
property on an annual basis beginning with the surplus cash calculation
for the year ended December 31, 1997. In the event of a sale or
refinancing, the Partnership will be entitled to 25% of the net sale
proceeds or, in the case of a refinancing, the greater of: (i) 25% of
the net refinancing proceeds or (ii) a payment equal to 1% of the then-
outstanding first mortgage loan balance. Net sale proceeds and net
refinancing proceeds are net of certain amounts due the borrower or
affiliates of the borrower. Upon the maturity or accelerated maturity
of the PIM the Partnership will be entitled to 25% of the difference
between the value of the property less: (i) the unpaid balance of the
first mortgage loan and (ii) certain amounts due the borrower or
affiliates of the borrower.
At June 30, 1996, the Partnership s PIM portfolio has a fair value of
approximately $150,011,000 and gross unrealized gains and losses of
approximately $910,000 and $1,942,000, respectively. The PIM
portfolio has maturities ranging from 1999 to 2032.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At June 30, 1996, the Partnership's MBS portfolio has an amortized
cost of approximately $34,020,871 and gross unrealized gains and
losses of approximately $514,404 and $350,233, respectively. The
Partnership's MBS have maturities ranging from 2010 to 2035.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended June
30, 1996 is as follows:
Total
Limited General Unrealized Partners'
Partners Partners Gain Equity
Balance at December 31,
1995 $200,575,459 $(102,556) $1,272,626 $201,745,529
Net income 5,535,259 171,194 - 5,706,453
Distributions (7,662,097) (200,256) - (7,862,353)
Decrease in unrealized
gain on MBS - - (1,108,455) (1,108,455)
Balance at June 30, 1996 $198,448,621 $(131,618) $ 164,171 $198,481,174
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management s expectations regarding the future financial performance and
future events. These forward-looking statements involve significant risk
and uncertainties, including those described herein. Actual results may
differ materially from those anticipated by such forward-looking
statements.
Liquidity and Capital Resources
The most significant demand on the Partnership's liquidity is
quarterly distributions paid to investors of approximately $3.9 million.
Funds used for investor distributions come from interest received on the
PIMs, MBS, cash and cash equivalents net of operating expenses, and certain
principal collections received on the PIMs and MBS. The Partnership funds a
portion of the distribution from principal collections causing the capital
resources of the Partnership to continually decrease. As the capital
resources decrease, the total cash inflows to the Partnership will also
decrease which will result in periodic downward adjustments to the
quarterly distributions paid to investors.
The General Partners periodically review the distribution rate
to determine whether an adjustment to the distribution rate 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
of cash available for distribution. To the extent quarterly distributions
differ from the cash available for distribution the General Partners may
adjust the distribution rate or distribute funds through a special
distribution.
During May 1996, the Partnership entered into an agreement with
the borrower of the Sundance Apartments PIM that reduces the monthly
interest paid by the borrower by 1% per annum and modifies the
participation features. The modification will reduce the monthly cash flow
of the Partnership, but will not materially affect the Partnership s
liquidity.
During the second quarter, the borrower of the Friendly Hills
PIM notified the Partnership of its intention to prepay that PIM in August
1996. In addition to the outstanding principal balance of approximately
$11.3 million, the Partnership will receive a prepayment penalty of
approximately $1,013,000 and all Shared Income and Minimum Additional
interest due. The Partnership will use the proceeds from this prepayment
to fund a special distribution of $.97 per Limited Partner interest during
August 1996.
Based on current projections, the General Partners believe the
Partnership can maintain the current distribution rate for the foreseeable
future following the prepayment of the Friendly Hills PIM and the
subsequent special distribution to investors.
For the first five years of the PIMs the borrowers are
prohibited from prepaying. For the second five years, the borrower can
prepay the loan incurring a prepayment penalty. The Partnership has the
option of calling certain PIMs by accelerating their maturity if the loans
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, interest rates and available financing will have
an impact on this decision.
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or
insured by the Federal National Mortgage Association ( FNMA ), the Federal
Home Loan Mortgage Corporation ( FHLMC ), the Government National Mortgage
Association ( GNMA ) and 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.
FNMA 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.
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 and the source of cash distributions for the six
months ended June 30, 1996 and the period from inception through June 30,
1996. 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.
(Amounts in thousands except
per Unit amounts)
Six Months Ended Inception to
June 30, 1996 June 30, 1996
Distributable Cash Flow:
Income for tax purposes $ 6,626 $103,721
Items not requiring or (not providing)
the use of operating funds:
Amortization of prepaid expenses, fees
and organization costs 409 6,478
Acquisition expenses paid from offering
proceeds charged to operations - 184
Shared appreciation income - (800)
Gain on sale of MBS - (253)
Total Distributable Cash Flow ("DCF") $ 7,035 $109,330
Limited Partners Share of DCF $ 6,824 $106,050
Limited Partners Share of DCF per Limited
Partner interests ( Unit ) $ .53 8.30 (b)
General Partners Share of DCF $ 211 $ 3,280
Net Proceeds from Capital Transactions:
Principal collections and prepayments
(including Shared Appreciation Income)
on PIMs $ 422 $ 18,260
Principal collections and sales proceeds
on MBS (including gain on sale) 1,400 61,944
Reinvestment of MBS and PIM principal
collections - (41,960)
Total Net Proceeds from Capital
Transactions $ 1,822 $ 38,244
Cash available for distribution
(DCF plus proceeds from Capital
transactions) $ 8,857 $147,574
Distributions:
Limited Partners $ 7,662 (a) $142,422 (a)
Limited Partners Average per Unit $ .60 (a) $ 11.15
(a)(b)
General Partners $ 211 (a) $ 3,280 (a)
Total Distributions $ 7,873 $145,702
(a) Includes an estimate of the distribution to be paid in August
1996.
(b) Limited Partners average per Unit return of capital as of August
1996 is $2.85 [$11.15 - $8.30]. Return of capital represents
that portion of distribution 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.
Operations
The following discussion relates to the operations of the Partnership
during the three and six months ended June 30, 1996 and 1995 (Amounts in
thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest income on PIMs:
Base interest $2,917 $3,095 $5,838 $6,139
Participation interest 393 435 552 435
Interest income on MBS 685 727 1,383 1,444
Other interest income 55 53 102 100
Partnership expenses (408) (452) (840) (883)
Distributable Cash Flow 3,642 3,858 7,035 7,235
Decrease in accrued
participation income (393) - (552) -
Amortization of prepaid fees
and expenses (389) (405) (777) (811)
Net income $2,860 $3,453 $5,706 $6,424
Operations, Continued
Net income decreased by approximately $593,000 and $718,000 for the
three and six months ended June 30, 1996, respectively, as compared to the
corresponding periods in 1995 due primarily to lower interest income on
PIMs. Base interest income on PIMs decreased in 1996 as compared to 1995
due primarily to the interest rate reduction on the Royal Palm Apartments
PIM in December 1995. Although participation interest income earned
decreased $435,000 for the three and six months ended June 30, 1996 as
compared to the three and six months ended June 30, 1995, participation
interest income accrued for 1996 will improve as a result of the Friendly
Hills Apartments PIM prepayment expected in August.
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 Security Holders
Response: None
Item 5. Other information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(10.1) Modification agreement dated May 23, 1996 by and between
Sundance Associates II, Ltd. and Krupp Insured Plus-III Limited
Partnership.
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: July 25, 1996