UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESx EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-17691 Krupp Insured Plus-III Limited Partnership (Exact name of registrant as specified in its charter) 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) (Registrant's telephone number, including area code) (617)423-2233 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Depositary Receipts representing Units of Limited Partner Interests 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. Aggregate market value of voting securities held by non-affiliates: Not applicable. Documents incorporated by reference: see Part IV, Item 14 The exhibit index is located on pages 8-12. PART I This Form 10-K 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. ITEM 1. BUSINESS Krupp Insured Plus-III Limited Partnership (the "Partnership") is a Massachusetts limited partnership which was formed on March 21, 1988. The Partnership raised approximately $255 million through a public offering of limited partner interests evidenced by units of depositary receipts ("Units") and used the net proceeds primarily to acquire participating insured mortgages ("PIMs") and mortgage-backed securities ("MBS"). The Partnership considers itself to be engaged in only one industry segment, investment in mortgages. The Partnership's investments in PIMs on multi-family residential properties consist of a MBS or an insured mortgage loan (collectively, the "insured mortgage") guaranteed or insured as to principal and basic interest and a participation feature that is not insured or guaranteed. The insured mortgages were issued or originated under or in connection with the housing programs of the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Housing Administration ("FHA") under the authority of the Department of Housing and Urban Development ("HUD"). PIMs provide the Partnership with monthly payments of principal and interest on the insured mortgage and also provide for Partnership participation in the current revenue stream and in residual value, if any, as a result of a sale or other realization of the underlying property from the participation feature. The borrower conveys the participation rights to the Partnership through a subordinated promissory note and mortgage. The Partnership also acquired MBS collateralized by single-family or multi-family mortgage loans issued or originated by GNMA, FNMA, the Federal Home Loan Mortgage Corporation ("FHLMC") or the FHA. FNMA, FHLMC and GNMA guarantee the principal and basic interest of the FNMA, FHLMC and GNMA MBS, respectively. HUD insures the FHA mortgage loan and the mortgage loans underlying the GNMA MBS. Prior to June 22, 1995 the Partnership could reinvest or commit for reinvestment proceeds received from prepayments or other realization of the mortgages in new mortgages, but following that date, the Partnership must distribute such proceeds to the investors through quarterly or possibly special distributions. Although the Partnership will terminate no later than December 31, 2028 it is expected that the value of the PIMs generally will be realized by the Partnership through repayment or sale as early as ten years from the dates of the closings of the permanent loans and that the Partnership may realize the value of all of its other investments within that time frame thereby resulting in a dissolution of the Partnership significantly prior to December 31, 2028. The Partnership's investments are not expected to be subject to seasonal fluctuations. However, the future performance of the Partnership will depend upon certain factors which can not be predicted. Such factors include interest rate fluctuation and the credit worthiness of GNMA, FNMA, HUD and FHLMC. Any ultimate realization of the participation features on PIMs is subject to similar risks associated with equity real estate investments, including: reliance on the owner's operating skills, ability to maintain occupancy levels, control operating expenses, maintain the property and obtain adequate insurance coverage; adverse changes in government regulations, real estate zoning laws, or tax laws; and other circumstances over which the Partnership may have little or no control. The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the Partnership's operations, and no adverse effect therefrom is now anticipated in the future. As of December 31, 1997, there were no personnel directly employed by the Partnership. ITEM 2. PROPERTIES None. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or to which any of its investments is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There currently is no established trading market for the Units. The number of investors holding Units as of December 31, 1997 was approximately 11,400. One of the objectives of the Partnership is to provide quarterly distributions of cash flow generated by its investments in mortgages. The Partnership anticipates that future operations will continue to generate cash available for distributions. During 1997, the Partnership made special distributions consisting primarily of principal proceeds from the Paces Arbor and Paces Forest PIM prepayments and the repayment of a multi-family MBS. During 1996, the Partnership made a special distribution consisting primarily of principal proceeds from the Friendly Hills PIM prepayment. The Partnership may make special distributions in the future if PIMs prepay or a sufficient amount of cash is available from MBS and PIM principal collections. The Partnership made the following distributions, in quarterly installments, and special distributions, to its Partners during the two years ended December 31, 1997 and 1996: 1997 1996 Average Average Amount Per Unit Amount Per Unit Distributions Limited Partners $ 15,324,194 $1.20 $15,324,193 $1.20 General Partners 373,032 410,687 15,697,226 15,734,880 Special Distributions Limited Partners 11,237,742 $ .88 12,387,057 $ .97 Total Distributions $ 26,934,968 $28,121,937 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Financial Statement Schedule, which are included in Item 7 and Item 8, (Appendix A) of this report, respectively. 1997 1996 1995 1994 1993 Total revenues $18,896,423 $ 15,578,710 $ 15,728,883 $ 15,725,544 $ 16,164,307 Net income 14,893,523 12,021,035 12,335,057 12,197,925 12,647,339 Net income allocated to: Limited Partners 14,446,717 11,660,404 11,965,005 11,831,987 12,267,919 Average per Unit 1.13 .91 .94 .93 .96 General Partners 446,806 360,631 370,052 365,938 379,420 Total assets at December 31 173,645,460 184,485,334 201,760,285 203,907,975 213,344,580 Distributions to: Limited Partners 15,324,194 15,324,193 15,324,192 21,242,039 21,183,876 Average per Unit 1.20 1.20 1.20 1.66 1.66 Special 11,237,742 12,387,057 - - - Average per Unit .88 .97 - - - General Partners 373,032 410,687 421,051 400,197 411,646 ITEM 7. 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 demands on the Partnership's liquidity are quarterly distributions paid to investors of approximately $3.8 million per quarter in 1997. 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 quarterly distributions from principal collections and funds all of any special distributions from principal collections and Shared Appreciation Income or Prepayment Penalties. As a result of principal collections, the capital resources of the Partnership will continually decrease. As the capital resources decrease, the total cash inflows to the Partnership will also decrease which will result in periodic 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 do not fully utilize the cash available for distribution and cash balances increase, the General Partners may adjust the distribution rate or distribute such funds through a special distribution. During the second quarter of 1997, the Partnership received the proceeds from the principal prepayments of the Paces Arbor and Paces Forest PIMs, together totaling $7,546,593. In addition to principal proceeds, the Partnership received a total of $197,939 of unpaid Additional Interest earned on property operations for the two properties and $679,193 of prepayment penalties. The Partnership made a special distribution of the capital proceeds from these transactions, the principal repayments and the prepayment penalties, of $.65 per limited partner interest in May 1997. During the fourth quarter of 1997, the Partnership received proceeds from the principal prepayments of the three Paddock Club PIMs, together totaling $26,714,879. In addition to principal proceeds, the Partnership received a total of $728,114 of unpaid Additional Interest earned on property operations for the three properties and $1,508,073 of prepayment penalties on the Jacksonville and Tallahassee properties. The Partnership also received $1,153,308 of Shared Appreciation Interest on the Ocala property. The Partnership made a special distribution of the capital proceeds from these transactions, the principal prepayments, the prepayment penalties and Shared Appreciation Interest of $2.30 per limited partner interest in January 1998. In addition, during the fourth quarter of 1997, the Partnership received a prepayment on a multi-family MBS in the amount of $2,889,030. The Partnership then made a special distribution of $.23 per Limited Partner interest with the proceeds from this prepayment. During the fourth quarter of 1997, the General Partners were informed of pending repayments for three other properties, which occurred during the first quarter of 1998. In January 1998, the Partnership received proceeds from the principal prepayments of the Fourth Ward Square and Meredith Square PIMs together totaling $11,756,585. In addition to principal proceeds, during December of 1997 the Partnership received a total of $397,462 of unpaid Additional Interest earned on property operations for both properties, a $422,001 prepayment penalty on Meredith Square and Shared Appreciation Interest of $697,500 on Fourth Ward Square. The Partnership distributed the capital transaction proceeds from these prepayments to investors through a special distribution in February of 1998 of $1.01 per limited partner interest. In February 1998, the Partnership received proceeds from the principal prepayment of $5,047,132 of the Rosewood PIM, $151,263 of minimum and shared income interest and $304,242 in prepayment penalties. The General Partners will distribute the capital proceeds from this transaction to investors through a special distribution during April 1998 of $.42 per limited partner interest. The Partnership s invested assets decreased as a result of the prepayment of the Friendly Hills PIM and the subsequent distribution of those proceeds to investors in August 1996. In addition to the outstanding principal balance of approximately $11.3 million, the Partnership received a prepayment penalty of $1,013,411 and all Shared Income and Minimum Additional Interest due of $126,820. The Partnership used the capital transaction proceeds from this prepayment to fund a special distribution of $.97 per Limited Partner interest in August 1996. 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. The modification will reduce the monthly cash flow of the Partnership, but will not materially affect the Partnership s liquidity. -7- The Partnership s invested assets have decreased as a result of these prepayments and subsequent distributions. The General Partners expect that there could be other loan repayments during 1998, although of the remaining properties held in the Partnership's portfolio, only a few may be positioned for a favorable sale or refinance at this time. The mediocre operating performance of many of the properties have not generated sufficient increases in property values to provide an incentive for their owners to pursue either a sale or refinance of their properties. During 1996, 1997 and the first quarter of 1998, the Partnership received significant prepayments on its PIMs. Due to this, the General Partners reviewed the Partnership's liquidity needs and determined that the regular distribution rate should be adjusted to $.76 per Unit per year (approximately $9.7 million per year and $2.43 million per quarter) commencing with the May 1998 distribution. The General Partners expect to periodically adjust the distribution rate as mortgage proceeds are received and subsequently distributed to the Limited Partners while also maintaining sufficient liquidity to meet the Partnership's anticipated needs. The General Partners will continue to monitor the appropriateness of this distribution rate in the future and will adjust it as necessary. For the first five years of the PIMs the borrowers are prohibited from repaying. For the second five years, the borrowers can repay the loans incurring a prepayment penalty. The Partnership has the option to call 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 FNMA, FHLMC, GNMA or 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. Operations The following discussion relates to the operation of the Partnership during the years ended December 31, 1997, 1996 and 1995. (Amounts in Thousands) 1997 1996 1995 Interest income on PIMs: Base interest $10,066 $11,262 $12,078 Participation interest 5,996 1,372 544 Interest income on MBS 2,390 2,706 2,913 Interest income - other 444 238 195 Partnership expenses (1,549) (1,604) (1,772)Amortization of prepaid expenses and fees (2,453) (1,953) (1,623) Net income $14,894 $12,021 $12,335 -8- Net income increased during 1997 as compared to 1996 by approximately $2,873,000. This increase was primarily due to higher participation income, net of lower base interest on PIMs and interest income on MBS and higher amortization expense directly related to the prepayments of the Paces Arbor, Paces Forest, Paddock Club Jacksonville, Paddock Club Tallahassee and Paddock Park II Apartment PIMs. An increase in Participation Interest of $4,624,000 was primarily a result of receiving Shared Appreciation Income and prepayment penalties from the prepayments of the Paces Arbor and Forest Apartments, the three Paddock Apartments, Fourth Ward Square Apartments and Meredith Apartment PIMs totaling $5,784,000 and $212,000 from five of the Partnerships PIMs. Also, the Partnership received participation income from the Fourth Ward Square and Meredith Square Apartments PIMs. Net income did not change materially when comparing 1996 to 1995. However, base interest decreased approximately by $816,000 during 1996 as compared to 1995 due primarily to the Partnership having received the prepayment of the Friendly Hills PIM and interest rate reductions on the Royal Palm Apartments and Sundance Apartments PIMs. Interest income on MBS decreased when comparing 1997 to 1996 and 1996 to 1995, because principal collections reduce the outstanding principal of the Partnership s MBS investments. Interest income other increased when comparing 1997 to 1996 and 1996 to 1995, primarily due to the Partnership s higher short-term investment balances. The Partnership expenses have decreased when comparing 1997 to 1996 and 1996 to 1995, primarily due to lower asset management fees. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Appendix A to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Information as to the directors and executive officers of Krupp Plus Corporation which is a General Partner of the Partnership and is the general partner of Mortgage Services Partners Limited Partnership, which is the other General Partner of the Partnership, is as follows: Position with Name and Age Krupp Plus Corporation Douglas Krupp (51) President, Co-Chairman and Director of the Board George Krupp (53) Co-Chairman and Director of the Board Peter F. Donovan (44) Senior Vice President Robert A. Barrows (40) Treasurer and Chief Accounting Officer Douglas Krupp and George Krupp are Co-Founders of The Berkshire Group. Established in 1969 as the Krupp Companies and headquartered in Boston, the Berkshire Group is a privately held real estate-based firm that has expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking and healthcare facility management. The Berkshire Group s interests include ownership of a mortgage company specializing in commercial mortgage financing with a portfolio of approximately $4.5 billion. In addition, The Berkshire Group has a majority ownership interest in Harborside Healthcare (NYSE-HBR), a long-term and subacute care company and a significant ownership interest in Berkshire Realty Company, Inc. (NYSE-BRI), a real estate investment trust specializing in apartment investments. Douglas Krupp is a graduate of Bryant College. In 1989 he received an honorary Doctor of Science in Business Administration from this institution and was elected trustee in 1990. Douglas Krupp is Chairman of The Berkshire Group, Chairman of the Board and a Director of both Berkshire Realty Company, Inc. and Harborside Healthcare. Mr. Krupp also serves as Chairman of the Board and Trustee of both Krupp Government Income Trust and Krupp Government Income Trust II. George Krupp received his undergraduate education from the University of Pennsylvania and Harvard University Extension School and holds a Master s Degree in History from Brown University. Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance and oversees the strategic growth plans of this mortgage banking firm which is the 12th largest in the United States based on servicing and asset management of a $4.4 billion loan portfolio. Previously he served as President of Berkshire Mortgage Finance and directed the production, underwriting and servicing and asset management activities of the firm. Prior to that, he was Senior Vice President of Berkshire Mortgage Finance and was responsible for all participating mortgage originations. Before joining the firm in 1984, he was Second Vice President, Real Estate Finance for Continental Illinois National Bank & Trust, where he managed a $300 million construction loan portfolio of commercial properties. Mr. Donovan received a B.A. from Trinity College and an M.B.A. degree from Northwestern University. Robert A. Barrows is Senior Vice President and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has held several positions within The Berkshire Group since joining the company in 1983 and is currently responsible for accounting, financial reporting, treasury, management information systems and loan closing and servicing for Berkshire Mortgage Finance. Prior to joining The Berkshire Group, he was an audit supervisor for Coopers & Lybrand L.L.P. in Boston. He received a B.S. degree from Boston College and is a Certified Public Accountant. ITEM 11. EXECUTIVE COMPENSATION The Partnership has no directors or executive officers. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1997, no person owned of record or was known by the General Partners to own beneficially more than 5% of the Partnership's 12,770,161 outstanding Units. The only interests held by management or its affiliates consist of its General Partner and Corporate Limited Partner interests. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this Item is contained in Note F to the Partnership's Financial Statements presented in Appendix A to this report. PART IV -10- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page F-2 of this report. 2. Financial Statement Schedules - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page F-2 of this report. All other schedules are omitted as they are not applicable, not required or the information is provided in the Financial Statements or the Notes thereto. (b) Exhibits: Number and Description Under Regulation S-K The following reflects all applicable Exhibits required under Item 601 of Regulation S-K: (4) Instruments defining the rights of security holders including indentures: (4.1) Agreement of Limited Partnership dated as of June 22, 1988 [Exhibit A included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated June 22, 1988 (File No. 33-21200)].* (4.2) Subscription Agreement whereby a subscriber agrees to purchase Units and adopts the provisions of the Agreement of Limited Partnership [Exhibit D included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated June 22, 1988 (File No. 33-21200)].* (4.3) Copy of First Amended and Restated Certificate of Limited Partnership filed with the Massachusetts Secretary of State on June 22, 1988. [Exhibit 4.4 to Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated June 22, 1988 (File No. 33-21200)].* (10) Material Contracts: (10.1) Revised form of Escrow Agreement [Exhibit 10.1 to Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated June 22, 1988 (File No. 33-21200)] * (10.2) Form of agreement between the Partnership and Krupp Mortgage Corporation [Exhibit 10.2 to Registrant's Registration Statement on Form S-11 dated April 20,1988 (File No. 33-21200)].* Sundance Apartments (10.3) Prospectus for GNMA Pools No. 276431 (CS) and 276432 (PL) [Exhibit 19.1 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.4) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated July 26, 1989 between Sundance Associates II, Ltd. and Krupp Insured Plus-III Limited Partnership [Exhibit 19.2 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.5) Modification agreement dated May 23, 1996 by and between Sundance Associates II, Ltd. and Krupp Insured Plus-III Limited Partnership [Exhibit 10.1 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-17691)].* Woodbine Apartments (10.6) Subordinated Multifamily Deed of Trust (including Subordinated Promissory Note) dated August 23, 1989 between Woodbine II Investors Limited Partnership and Krupp Insured Plus-III Limited Partnership [Exhibit 19.3 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.7) Participation Agreement dated August 23, 1989 between The Krupp Mortgage Corporation ("Mortgagee") and Krupp Insured Plus-III Limited Partnership (the "Participant") [Exhibit 19.4 to Registrant Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.8) Mortgage Note dated August 23, 1989 between Woodbine II Investors Limited Partnership and Krupp Mortgage Corporation. [Exhibit 19.5 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.9) Deed of Trust dated August 23, 1989 between Woodbine II Investors Limited Partnership and Krupp Mortgage Corporation. [Exhibit 19.6 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* Ironwood Apartments (10.10) Prospectus for GNMA Pool No. 272542(CS) and 272543(PN). [Exhibit 19.7 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.11) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated July 18, 1989 between Ironwood Associates Limited Partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.8 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.12) Mortgage Note dated July 18, 1989 between Ironwood Associates Limited Partnership and Krupp Mortgage Corporation. [Exhibit 19.9 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.13) Mortgage dated July 18, 1989 between Ironwood Associates Limited Partnership and Krupp Mortgage Corporation. [Exhibit 19.10 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* Casa Marina Apartments (10.14) Prospectus for GNMA Pool No. 279699 (CS) and 279700 (PL) [Exhibit 19.11 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.15) Subordinated Multifamily Mortgage(including Subordinated Promissory Note)dated June 29, 1989 between Beaux Gardens Associates, LTD., a Florida limited partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.12 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.16) Participation Agreement dated July 31, 1989 between Krupp Insured Plus-II Limited Partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.13 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* Rosewood Apartments (10.17) Prospectus for GNMA Pool No. 280647(CS) and 280648(PL) [Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17691).* (10.18) Security Deed Note, dated September 28, 1989 between Knight Davidson Rosewood I, a Georgia general partnership and Krupp Mortgage Corporation. [Exhibit 19.14 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* (10.19) Security Deed dated September 28, 1989 between Knight Davidson Rosewood I, a Georgia general partnership and Krupp Mortgage Corporation. [Exhibit 19.15 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0- 17691)].* (10.20) Subordinated Multifamily Deed to Secure Debt (including Subordinated Promissory Note) dated September 28,1989 between Knight Davidson Rosewood I, a Georgia general partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.16 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1989 (File No. 0-17691)].* Windsor Court (10.21) Supplement to Prospectus for FNMA Pool No. MX-073006 [Exhibit 10.23 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17691).* (10.22) Subordinated Multifamily Mortgage(including Subordinated Promissory Note) dated September 26, 1989 between Sexton 1986 Windsor-V, an Indiana limited partnership and Krupp Insured Plus-III Limited Partnership [Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17691).* Harbor Club Apartments (10.23) Prospectus for GNMA Pool No. 259237(CS) and 259238(PN). [Exhibit 19.3 to Registrants's Report on Form 10-Q for the quarter ended March 31,1990 (File No. 0-17691)].* (10.24) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated January 30,1990 between Ann Arbor Harbor Club, a Texas limited partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.4 to Registrants's Report on Form 10-Q for the quarter ended March 31,1990 (File No. 0-17691)].* Mill Ponds Apartments (10.25) Prospectus for FNMA Pool No. MX-073012. [Exhibit 19.1 to Regi-strant's Report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17691)].* (10.26) Multifamily Mortgage (including Subordinated Promissory Note) dated May 17, 1990 between State Bank of Countryside, Illinois and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.2 to Registrants's Report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17691)].* Fourth Ward (10.27) Prospectus for GNMA Pool No. 280969(CS) and 280970(PL). [Exhibit 19.5 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1990 (File No. 0-17691)].* (10.28) Subordinated Multifamily Deed of Trust (including Subordinated Promissory Note) dated June 27, 1990 between The Fourth Ward Square Associates Limited Partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.6 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1990 (File No. 0-17691)].* Meridith Square (10.29) Prospectus for FNMA Pool No. MX-073019. [Exhibit 10.41 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0- 17691)].* (10.30) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated September 17, 1990 between BAND/Carolina Associates Limited Partnership, a Virginia limited partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-17691)].* -14- Marina Shore Apartments (10.31) Prospectus for GNMA Pool No. 280971(CS) and 280972(PL). [Exhibit 19.03 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1991 (File No. 0-17691)].* (10.32) Subordinated Multifamily Deed of Trust (including Subordinated Promissory Note) dated June 27, 1990 between Marina Shores Associates One, a Virginia limited partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.04 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1991 (File No. 0-17691)].* (10.33) Participation Agreement dated June 29, 1990 by and between Krupp Insured Plus-III Limited Partnership and Krupp Insured Mortgage Limited Partnership. [Exhibit 19.05 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1991 (File No. 0- 17691)].* Royal Palm Place (10.34) Prospectus for FNMA Pool No. MB-109057. [Exhibit 10.45 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0- 17691)].* (10.35) Subordinated Multifamily Mortgage dated March 20, 1991 between Royal Palm Place, Ltd., a Florida Limited Partnership and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.2 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1991 (File No. 0-17691)].* (10.36) Modification Agreement dated March 20, 1991, between Royal Palm Place, Ltd.,and Krupp Insured Plus-III Limited Partnership. [Exhibit 19.3 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1991 (File No. 0-17691)].* (10.37) Participation Agreement dated March 20, 1991 by and between Krupp Insured Plus-III Limited Partnership and Krupp Insured Plus Limited Partnership. [Exhibit 19.1 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1991 (File No. 0- 17691)].* (10.38) Amended and Restated Subordinated Promissory Note by and between Royal Palm, Ltd. and Krupp Insured Plus- III Limited Partnership.[Exhibit 10.49 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,1995(File No.0-17691)].* * Incorporated by reference (c) Reports on Form 8-K During the last quarter of the year ended December 31, 1997, the Partnership did not file any reports on Form 8-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 2nd day of February, 1998. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP By: Krupp Plus Corporation, a General Partner By: /s/ Douglas Krupp Douglas Krupp, President, Co- Chairman (Principal ExecutiveOfficer)and Director of Krupp Plus Corporation Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 2nd day of February, 1998. Signatures Title(s) /s/ Douglas Krupp President,Co-Chairman (Principal Executive Douglas Krupp Officer), and Director of Krupp Plus Corporation, a General Partner. /s/ George Krupp Co-Chairman (Principal Executive Officer) George Krupp and Director of Krupp Plus Corporation, a General Partner. /s/ Peter F. Donovan Senior Vice President of Krupp Plus Peter F. Donovan Corporation, a General Partner. /s/ Robert A. Barrows Treasurer and Chief Accounting Officer Robert A. Barrows of Krupp Plus Corporation, a General Partner. -16- APPENDIX A KRUPP INSURED PLUS-III LIMITED PARTNERSHIP FINANCIAL STATEMENTS AND SCHEDULEITEM 8 of FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 1997 F-1 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Accountants F-3 Balance Sheets at December 31, 1997 and 1996 F-4 Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 F-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 1997, 1996 and 1995 F-6 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-7 Notes to Financial Statements F-8 - F-15 Schedule IV - Mortgage Loans on Real Estate F-16 - F-18 All other schedules are omitted as they are not applicable or not required, or the information is provided in the financial statements or the notes thereto. F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Insured Plus-III Limited Partnership: We have audited the financial statements and the financial statement schedule of Krupp Insured Plus-III Limited Partnership (the "Partnership") listed in the index on page F-2 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Krupp Insured Plus-III Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts February 2, 1998, except as to the information presented in Note I, for which the date is February 17, 1998 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 Participating Insured Mortgages ("PIMs") (Notes B, C, H and I) $104,165,895 $139,380,751 Mortgage-Backed Securities and insured mortgages ("MBS")(Notes B, D and H) 29,220,457 32,914,934 Total mortgage investments 133,386,352 172,295,685 Cash and cash equivalents (Notes B, H and I) 35,473,221 4,666,597 Interest receivable and other assets 949,618 1,233,967 Prepaid acquisition expenses, net of accumulated amortization of $5,921,472 and $6,717,429, respectively (Note B) 2,902,255 4,758,829 Prepaid participation servicing fees, net of accumulated amortization of $1,680,937 and $2,272,992, respectively (Note B) 934,014 1,530,256 Total assets $173,645,460 $184,485,334 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 170,568 $ 18,716 Partners' equity (deficit) (Notes A, E and I): Limited Partners 172,409,394 184,524,613 (12,770,261 Units outstanding) General Partners (78,838) (152,612) Unrealized gain on MBS (Note B) 1,144,336 94,617 Total Partners' equity 173,474,892 184,466,618 Total liabilities and Partners' equity $173,645,460 $184,485,334 The accompanying notes are an integral part of the financial statements. F-4 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Revenues:(Notes B, C and D) Interest income - PIMs: Base interest $10,066,327 $11,262,507 $12,078,125 Participation interest 5,996,197 1,371,889 543,613 Interest income - MBS 2,389,509 2,705,932 2,912,632 Interest income - other 444,390 238,382 194,513 Total revenues 18,896,423 15,578,710 15,728,883 Expenses: Asset management fee to an affiliate (Note F) 1,217,413 1,352,679 1,412,787 Expense reimbursements to affiliates (Note F) 129,348 123,639 181,503 Amortization of prepaid fees and expenses (Note B) 2,452,816 1,953,298 1,622,438 General and administrative 203,323 128,059 177,098 Total expenses 4,002,900 3,557,675 3,393,826 Net income (Notes E and G) 14,893,523 $12,021,035 $12,335,057 Allocation of net income (Notes E and G): Limited Partners $14,446,717 $11,660,404 $11,965,005 Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ 1.13 $ .91 $ .94 General Partners $ 446,806 $ 360,631 $ 370,052 F-5 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995 Total Limited General Unrealized Partners' Partners Partners Gain Equity Balance at December 31, 1994 $203,934,646 $ (51,557) - $203,883,089 Net income 11,965,005 370,052 - 12,335,057 Distributions (15,324,192) (421,051) - (15,745,243) Unrealized gain on MBS - - 1,272,626 1,272,626 Balance at December 31, 1995 200,575,459 (102,556) 1,272,626 201,745,529 Net income 11,660,404 360,631 - 12,021,035 Quarterly distributions (15,324,193) (410,687) - (15,734,880) Special distributions (12,387,057) - - (12,387,057) Change in unrealized gain on MBS - - (1,178,009) (1,178,009) Balance at December 31, 1996 184,524,613 (152,612) 94,617 184,466,618 Net income 14,446,717 446,806 - 14,893,523 Quarterly distributions (15,324,194) (373,032) - (15,697,226) Special distributions (11,237,742) - - (11,237,742) Change in unrealized gain on MBS - - 1,049,719 1,049,719 Balance at December 31, 1997 $172,409,394 $ (78,838) $1,144,336 $173,474,892 The accompanying notes are an integral part of the financial statements. F-7 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Operating activities:Net income $ 14,893,523 $12,021,035 $12,335,057 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of MBS premium 92,322 - - Amortization of prepaid fees and expenses 2,452,816 1,953,298 1,622,438 Prepayment penalties and shared appreciation interest (4,460,075) (1,013,411) - Changes in assets and liabilities: Decrease in interest receivable and other assets 284,349 690,435 163,681 Increase (decrease) in liabilities 151,852 3,960 (10,130) Net cash provided by operating activities 13,414,787 13,655,317 14,111,046 Investing activities: Principal collections and prepayments on PIMsincluding prepayment penalties and shared appreciation interest of $4,460,075 and $1,013,411 in 1997 and 1996, respectively 39,674,931 13,098,312 972,384 Investment in MBS - - (1,027,567) Principal collections and prepayments on MBS 4,651,874 2,601,020 1,866,085 Net cash provided by investing activities 44,326,805 15,699,332 1,810,902 Financing activities: Special distributions (11,237,742) (12,387,057) - Quarterly distributions (15,697,226) (15,734,880) (15,745,243) Net cash used for financing activities (26,934,968) (28,121,937) (15,745,243) Net increase in cash and cash equivalents 30,806,624 1,232,712 176,705 Cash and cash equivalents, beginning of period 4,666,597 3,433,885 3,257,180 Cash and cash equivalents, end of period $ 35,473,221 $ 4,666,597 $ 3,433,885 The accompanying notes are an integral part of the financial statements. F-8 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS A. Organization Krupp Insured Plus-III Limited Partnership (the "Partnership") was formed on March 21, 1988 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. The Partnership issued all of the General Partner Interests to Krupp Plus Corporation and Mortgage Services Partners Limited Partnership in exchange for capital contributions aggregating $3,000. The Partnership terminates on December 31, 2028, unless terminated earlier upon the occurrence of certain events as set forth in the Partnership Agreement. The Partnership commenced the public offering of Units on June 24, 1988 and completed its public offering having sold 12,770,161 Units for $254,686,736 net of purchase volume discounts of $716,484 as of June 22, 1990. B. Significant Accounting Policies The Partnership uses the following accounting policies for financial reporting purposes, which differ in certain respects from those used for federal income tax purposes (Note G): MBS The Partnership, in accordance with Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ( FAS 115 ), classifies its MBS portfolio as available- for-sale. As such, the Partnership carries its MBS at fair market value and reflects any unrealized gains (losses) as a separate component of Partners' Equity. The Partnership amortizes purchase premiums or discounts over the life of the underlying mortgages using the effective interest method. PIMs The Partnership accounts for its MBS portion of a PIM in accordance with FAS 115 under the classification of held to maturity. The Partnership carries the Government National Mortgage Association ( GNMA ) or Federal National Mortgage Association ( FNMA ) MBS at amortized cost. The Federal Housing Administration PIM is carried at amortized cost unless the General Partner of the Partnership believes there is a impairment in value, in which case a valuation allowance would be established in accordance with Financial Accounting Standards No. 114, Accounting by Creditors for impairment of a Loan, and Financial Accounting Standard No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Basic interest on PIMs is recognized based on the stated rate of the Federal Housing Administration ("FHA") mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA or FNMA MBS. Participation interest is recognized as earned and when deemed collectible by the Partnership. F-9 Continued B. Significant Accounting Policies, Continued Cash and Cash Equivalents The Partnership includes all short-term investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. The Partnership invests its cash primarily in commercial paper and money market funds with a commercial bank and has not experienced any loss to date on its invested cash. Prepaid Expenses and Fees Prepaid expenses and fees consist of prepaid acquisition fees and expenses and prepaid participation servicing fees paid for the acquisition and servicing of PIMs. The Partnership amortizes the prepaid acquisition fees and expenses using a method that approximates the effective interest method over a period of ten to twelve years,which represents the actual maturity or anticipated payoff of the underlying mortgage. The Partnership amortizes prepaid participation servicing fees using a method that approximates the effective interest method over a ten year period beginning at final endorsement of the loan if a Department of Housing and Urban Development ("HUD") insured loan or GNMA loan and at closing if a FNMA loan. Income Taxes The Partnership is not liable for federal or state income taxes because Partnership income is allocated to the partners for income tax purposes. If the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and such an examination results in a change in Partnership taxable income, such change will be reported to the partners. Estimates and Assumptions The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the period. Actual results could differ from those estimates. C. PIMs The Partnership has investments in twelve PIMs. The Partnership's PIMs consist of a GNMA or FNMA MBS representing the securitized first mortgage loan on the underlying property or a sole participation interest in a first mortgage loan originated under the FHA lending program on the underlying property (collectively the "insured mortgages"), and participation interests in the revenue stream and appreciation of the underlying property above specified base levels. The borrower conveys these participation features to the Partnership generally through a subordinated mortgage (the "Agreement"). The Partnership receives guaranteed monthly payments of principal and interest on the GNMA and FNMA MBS and HUD insures the first mortgage loan underlying the GNMA MBS and the FHA mortgage loan. The borrower usually can Continued F-10 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued C. PIMs, Continued not prepay the first mortgage loan during the first five years and may prepay the first mortgage loan thereafter subject to a 9% prepayment penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty thereafter. The Partnership may receive interest related to its participation interests in the underlying property, however, these amounts are neither insured nor guaranteed. Generally, the participation features consist of the following:(I) "Minimum Additional Interest" at a stated rate ranging from .5% to .75% per annum calculated on the unpaid principal balance of the first mortgage on the underlying property , (ii) "Shared Income Interest" ranging from 25% to 30% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent that it exceeds the amount of Minimum Additional Interest received during such month, (iii) "Shared Appreciation Interest" ranging from 25% to 30% of any increase in Value of the underlying property in excess of a specified base. Payment of participation interest from the operations of the property is limited to 50% of net revenue or surplus cash as defined by FNMA or HUD, respectively. The aggregate amount of Minimum Additional Interest, Shared Income Interest and Shared Appreciation Interest payable on the maturity date by the underlying borrower generally cannot exceed 50% of any increase in value of the property. However, generally any net proceeds from the sale or refinancing of the underlying property will be available to satisfy any accrued but unpaid Shared Income or Minimum Additional interest. Shared Appreciation Interest is payable when one of the following occurs: (1) the sale of the underlying property to an unrelated third party on a date which is later than five years from the date of the Agreement, (2) the maturity date or accelerated maturity date of the Agreement, or (3) prepayment of amounts due under the Agreement and the insured mortgage. Under the Agreement, the Partnership, upon giving twelve months written notice, can accelerate the maturity date of the Agreement and insured mortgage to a date not earlier than ten years from the date of the Agreement for (a) the payment of all participation interest due under the Agreement as of the accelerated maturity date, or (b) the payment of all participation interest due under the Agreement plus all amounts due on the first mortgage note on the property. During December 1997, the Partnership received prepayments of the Paddock Park II, Paddock Park Tallahassee and Paddock Jacksonville Apartment PIMs. The Partnership received the outstanding principal balances of $10,167,304, $8,402,247 and $8,145,328 respectively. In addition, the Partnership also received Shared Appreciation or prepayment penalties of $1,153,308, $774,000, and $734,073 and Minimum and Shared Income Interest of $211,835, $170,377, and $345,902 for Paddock Park II, Paddock Park Tallahassee and Paddock Park Jacksonville PIMs, respectively. The Partnership made a special distribution of $2.30 per Limited Partner interest with the proceeds from the outstanding principal proceeds and the prepayment penalties during January 1998. Furthermore, during December 1997, the Partnership also received F-11 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued prepayment penalties and Shared Appreciation of $422,001 and $697,500 and Minimum and Shared Income Interest of $87,972 and $309,490 for the Meredith and Fourth Ward Square Apartment PIMs, respectively (See Note I). Continued. C. PIMs, Continued On April 25, 1997, the Partnership received a prepayment of the Paces Arbor and Paces Forest Apartment PIMs. The Partnership received the outstanding principal balances of $3,390,705 and $4,155,888, respectively. In addition, the Partnership also received a prepayment penalty of $679,193 and Minimum Additional and Shared Income Interest of $197,939. On May 23, 1997, the Partnership made a special distribution of $.65 per Limited Partner interest with the proceeds from the outstanding principal proceeds and the prepayment penalty. On August 1, 1996, the Partnership received a prepayment of the Friendly Hills PIM. The Partnership received the outstanding principal balance of $11,260,118, a prepayment penalty of $1,013,411 and Minimum Additional and Shared Income Interest of $126,820. On August 15, 1996, the Partnership made a special distribution of $.97 per Limited Partner interest with the proceeds from this repayment. 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. At December 31, 1997 and 1996 there were no loans within the Partnership s portfolio that were delinquent as to principal or interest. Listed in the chart is a summary of the Partnership's PIM investments at December 31, 1997 and 1996: Aggregate Permanent Aggregate Outstanding Original Number Interest Maturity Principal Balance at Issuer Principal of PIMs Rate Range Date Range December 31, 1997 1996 FNMA $ 43,028,742 4 6.5%-8% 10/99 - 4/06 $ 40,908,767 $ 67,356,096 (a) (a) (a) GNMA 60,499,733 7 8%-8.50% 8/30 - 5/32 59,061,999 67,808,790 (b) FHA 4,327,800 1 8.675% 1/31 4,195,129 4,215,865 $107,856,275 12 $104,165,895 $139,380,751 (a)Includes the Partnership's share of the Royal Palm Place PIM, in which the Partnership holds 73% of the $22,000,000 total PIM and an affiliate of the Partnership holds the remaining 27%. During December 1995, the Partnership agreed to a modification of the Royal Palm PIM. The Partnership received a reissued Federal National Mortgage Association ("FNMA") mortgage-backed security ("MBS") and increased its participation percentage in income and appreciation from 25% to 30%. The Partnership will receive interest only payments on the FNMA MBS at interest rates ranging from 6.25% to 8.775% per annum through maturity. Also, the Partnership has received its pro-rata share of a $90,644 principal payment made in December 1995 and its pro-rata share of a $250,000 principal payment made in January 1997. The Partnership will also receive its pro-rata share of annual principal payments totaling $250,000 due each year in January for the next three years. Continued C. PIMs, Continued (b) Includes the Partnership's share of the Marina Shores PIM in which the Partnership holds 71% of the $21,200,000 total PIM and an affiliate of the Partnership holds the remaining 29%. The underlying mortgages of the PIMs are collateralized by multi-family apartment complexes located in 9 states, primarily Florida and North Carolina. The apartment complexes range in size from 96 to 392 units. D. MBS During the fourth quarter of 1997, the Partnership received a prepayment on a multi-family MBS in the amount of $2,889,030. The Partnership then made a special distribution of $.23 per Limited Partner interest with the proceeds from this prepayment. At December 31, 1997, the Partnership's MBS portfolio has an amortized cost of $28,076,121 and unrealized gains and losses of approximately $1,144,469 and $133, respectively. At December 31, 1996, the Partnership's MBS portfolio had an amortized cost of $32,820,317 and unrealized gains and losses of $515,192 and $420,575, respectively. The MBS portfolio has maturity dates ranging from 2010 to 2035. E. Partners' Equity Under the terms of the Partnership Agreement, profits from Partnership operations and Distributable Cash Flow are allocated 97% to the Unit holders and Corporate Limited Partner (the "Limited Partners") and 3% to the General Partners. Upon the occurrence of a capital transaction, as defined in the Partnership Agreement, net cash proceeds and profits from the capital transaction will be distributed first, to the Limited Partners until they have received a return of their total invested capital, second, to the General Partners until they have received a return of their total invested capital, third, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to any deficiency in the 11% cumulative return on their invested capital that exists through fiscal years prior to the date of the capital transaction, fourth, to the class of GeneralPartners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and fifth, 96% to the Limited Partners and 4% to the General Partners. Losses from a capital transaction will be allocated 97% to the Limited Partners and 3% to the General Partners. F-13 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued As of December 31, 1997, the following cumulative partner contributions and allocations have been made since inception of the Partnership: Continued E. Partners' Equity, continued Corporate Total Limited General Unrealized Partners' Unitholders Partner Partners gain on MBS Equity Capital contributions $254,686,736 $ 2,000 $ 3,000 $ - $254,691,736 Syndication costs (15,834,700) - - - (15,834,700) Distributions (161,576,650) (1,376) (3,754,772) - (165,332,798) Special Distributions (23,624,614) (185) - - (23,624,799) Net income 118,757,184 999 3,672,934 - 122,431,117 Unrealized gain on MBS - - - 1,144,336 1,144,336 Total at December 31, 1997 $172,407,956 $ 1,438 $ (78,838) $ 1,144,336 $173,474,892 F. Related Party Transactions Under the terms of the Partnership Agreement, the General Partners or their affiliates are paid an Asset Management Fee equal to .75% per annum of the value of the Partnership's actual and committed mortgage assets, payable quarterly. The General Partners may also receive an incentive management fee in the amount equal to .3% per annum on the Partnership's total invested assets provided the Unitholders have received their specified non-cumulative return on their Invested Capital. Total Asset Management Fees and Incentive Management Fees payable to the General Partners or their affiliates shall not exceed 10% of Distributable Cash Flow over the life of the Partnership. Additionally, the Partnership reimburses affiliates of the General Partners for certain expenses incurred in connection with maintaining the books and records of the Partnership and the preparation and mailing of financial reports, tax information and other communications to the investors. G. Federal Income Taxes The reconciliation of the net income reported in the accompanying statement of income with the net income reported in the Partnership's 1997 federal income tax return is as follows: Net income per statement of income $14,893,523 Book to tax difference for amortization of prepaid expenses and fees (377,178) Net income for federal income tax purposes $14,516,345 The allocation of the net income for federal income tax purposes for 1997 is as follows: F-15 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued G. Federal Income Taxes, continued Portfolio Income Unitholders $14,214,546 Corporate Limited Partner 111 General Partners 301,688 $14,516,345 During the years ended December 31, 1997, 1996 and 1995 the average per Unit net income to the Unitholders for federal income tax purposes was $1.11, $1.00 and $.99, respectively. The basis of the Partnership s assets for financial reporting purposes is less than its tax basis by approximately $773,000 and $2,200,000 at December 31, 1997 and 1996, respectively. The basis of the Partnership s liabilities for financial reporting purposes are the same for its tax basis at December 31, 1997 and 1996, respectively H. Fair Value Disclosures of Financial Instruments The Partnership uses the following methods and assumptions to estimate the fair value of each class of financial instrument: Cash and cash equivalents The carrying amount approximates the fair value because of the short maturity of those instruments. MBS The Partnership estimates the fair value of MBS based on quoted market prices. PIMs There is no active trading market for these investments. Management estimates the fair value of the PIMs using quoted market prices of MBS having the same stated coupon rate.Management does notinclude any participation income in the Partnership s estimated fair value arising from appreciation of the properties, because Management does not believe it can predict the time of realization of the feature with any certainty. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in PIMs had gross unrealized gains and losses of $1,407,000 and $57,000 at December 31, 1997, respectively,and gross unrealized gains and losses of $2,784,000 and $1,123,000 at December 31, 1996, respectively. At December 31, 1997 and 1996, the Partnership estimates the fair values of its financial instruments as follows: F-16 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued Continued KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued H. Fair Value Disclosures of Financial Instruments, continued (rounded to thousands) 1997 1996 Cash and cash equivalents $ 35,473 $ 4,667 MBS 29,220 32,915 PIMs 105,516 141,042 $170,209 $178,624 I. Subsequent Events On January 15, 1998 and January 26, 1998, the Partnership received proceeds from the prepayments of the Fourth Ward Square Apartments and Meredith Square Apartments PIMs, respectively. The Partnership received the outstanding principal balances of $7,067,690 and $4,688,895 on the Fourth Ward Square and Meredith Square Apartment PIMs, respectively, plus outstanding interest. The Partnership distributed $1.01 per Limited Partner Interest in February, 1998 from the proceeds of the principal balances, Shared Appreciation Income and prepayment penalty income received on these loans. On February 17, 1998, the Partnership received proceeds from the prepayment of the Rosewood Apartments PIM. The Partnership received the outstanding principal balance of $5,047,132 plus, minimum and shared income interest of $151,263 and a prepayment penalty of $304,242. The Partnership plans on distributing $.42 per Limited Partner Interest during April 1998 from the principal proceeds and prepayment penalty income received on this loan. F-18 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE December 31, 1997 __________ Approx. Normal Maturity Monthly Original Current Carrying Interest Date Payment Face Face Amount at PIMs (a) Rate (b) j k Amount Amount 12/31/97(p) GNMA Casa Marina Apts. Miami, FL 8.00%(h) 12/15/30 $ 49,000 $ 7,099,700 $ 6,885,660 $ 6,885,660 (d)(f)(h) Fourth Ward Sq. 8.00% 11/15/31 50,000 7,250,000 7,069,647 7,069,647 Apts. (c)(f)(h) Charlotte, NC Harbor Club 8.00% 10/15/31 97,000 13,562,000 13,341,735 13,341,735 Apts. (e) Ann Arbor, MI (I)(1) Ironwood Place 8.50% 8/15/30 37,000 4,997,603 4,864,481 4,864,481 Apts. (c)(f)(h) Ann Arbor, MI Marina Shores 8.00% 5/15/32 104,000 15,000,000 14,648,595 14,648,595 Apts. (c)(f)(h) VA Beach, VA Rosewood Apts. 8.00% 2/15/31 36,000 5,197,314 5,048,204 5,048,204 Cartersville, GA Sundance Apts. 8.50% 12/15/30 54,000 7,393,116 7,203,677 7,203,677 Miami, FL (c)(e) (g)(n) 60,499,733 59,061,999 59,061,999 FNMA Meridith Square 8.00% 10/1/00 35,000 4,900,000 4,688,895 4,688,895 Apts. (c)(e)(g) (o) Columbia, SC Mill Ponds 7.50% 6/1/00 70,000 10,450,000 9,912,039 9,912,039 Apts. (c)(f)(g) (o) Naperville, IL Royal Palm Pl. 6.5% 4/1/06 111,000 15,978,742 15,310,002 15,310,002 Apts. (c)(m) (o) Kendall, FL Windsor Court 7.25% 10/1/99 77,000 11,700,000 10,997,831 10,997,831 Apts. (c)(e)(g) (o) Idianapolis, IN 43,028,742 40,908,767 40,908,767 FHA Woodbine Apts 8.68% 1/1/31 32,000 4,327,800 4,195,129 4,495,129 Boise, ID (c)(e)(g) Total $107,856,275 $104,165,895 $104,165,895 (a) The Participating Insured Mortgages ("PIMs") consist of either a mortgage-backed security ("MBS") issued and guaranteed by the Federal National Mortgage Association ("FNMA"), an MBS issued or guaranteed by the Government National Mortgage Association ("GNMA") or a sole participation interest in a first mortgage insured by the United States Department of Housing and Urban Development ("HUD") and a subordinated promissory note and mortgage or shared income and appreciation agreement with theunderlying Borrower that conveys participation interests in the revenue stream and appreciation of the underlying property above certain specified base levels. (b) Represents the permanent interest rate of the GNMA or FNMA MBS or the HUD-insured first mortgage less the servicers fee. The Partnership may also receive additional interest, consisting of (i) Minimum Additional Interest based on a percentage of the unpaid principal balance of the first mortgage on the property, (ii) Shared Income Interest based on a percentage of monthly gross income generated by the underlying property in excess of a specified base amount (but only to the extent it exceeds the amount of Minimum Additional Interest received during such month), (iii) Shared Appreciation Interest based on a percentage of any increase in the value of the underlying property in excess of a specified base value. (c) Minimum additional interest is at a rate of .5% per annum calculated on the unpaid principal balance of the first mortgage note. (d) Minimum additional interest is at a rate of .75% per annum calculated on the unpaid principal balance of the first mortgage note. (e) Shared income interest is based on 25% of monthly gross rental income over a specified base amount. (f) Shared income interest is based on 30% of monthly gross rental income over a specified base amount. F-20 (g) Shared appreciation interest is based on 25% of any increase in the value of the project over the specified base value. (h) Shared appreciation interest is based on 30% of any increase in the value of the project over the specified base value. (i) Shared appreciation interest is based on 35% of any increase in the value of the project over the specified base value. (j) The Partnership's GNMA MBS and HUD mortgage loans have call provisions, which allow the Partnership to accelerate their respective maturity date. Continued (k) The normal monthly payment consisting of principal and interest is payable monthly at level amounts over the term of the GNMA MBS and the HUD direct mortgages. The normal monthly payment consisting of principal and interest for FNMA MBS is payable at level amounts based on a 35 year amortization and all remaining unpaid principal and accrued interest is due at the end of year ten. The GNMA MBS, FNMA MBS and HUD-insured first mortgage loans may not be prepaid during the first five years and may generally be prepaid subject to a 9% prepayment penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty after year ten. (l) On April 7, 1992, the Partnership entered into an agreement which provided for a one-year reduction in the interest rate on the Harbor Club-Ann Arbor PIM from 8% to 6% for one year retroactive to February 1, 1992 and to 7% for the following year. In exchange for the reduction, the Minimum Additional Interest increased from .50% to .75% and the Shared Appreciation Interest Base decreased from $14,570,000 to $13,562,000. (m) During December 1995, the Partnership agreed to a modification of the Royal Palm PIM. The Partnership received a reissued Federal National Mortgage Association ("FNMA") mortgage-backed security ("MBS") and increased its participation percentage in income and appreciation from 25% to 30%. Also, the Partnership has received its pro-rata share of a $90,644 principal payment made in December 1995 and its pro-rata share of a $250,000 principal payment made in January 1997. The Partnership will also receive its pro-rata share of annual principal payments totaling $250,000 due each year in January for the next three years. (n) On May 23, 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. (o) The approximate principal balance due at maturity for each PIM, listed below, is as follows: PIM Amount Meridith Square Apartments $ 4,562,000 Mill Ponds Apartments $ 9,655,000 Royal Palm Place Apartments $14,766,010 Windsor Court Apartments $10,767,000 (p) The aggregate cost of PIMs for federal income tax purposes is $104,165,895. A reconciliation of the carrying value of PIMs for each of the three years in the period ended December 31, 1997 is as follows: 1997 1996 1995 Balance at beginning of period $139,380,751 $151,465,652 $152,438,036 Deductions during period: Principal collections (35,214,856) (12,084,901) (972,384) Balance at end of period $104,165,895 $139,380,751 $151,465,652