UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q-A (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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 September 30, December 31, 1998 1997 Participating Insured Mortgages ("PIMs") (Note 2) $ 75,449,114 $104,165,895 Mortgage-Backed Securities and insured mortgages ("MBS")(Note 3) 16,979,998 29,220,457 Total mortgage investments 92,429,112 133,386,352 Cash and cash equivalents 11,036,911 35,473,221 Interest receivable and other assets 627,842 949,618 Prepaid acquisition expenses and fees, net of accumulated amortization of $4,475,668 and $5,921,472, respectively 1,844,335 2,902,255 Prepaid participation servicing fees, net of accumulated amortization of $1,676,460 and $1,680,937, respectively 233,570 934,014 Total assets $106,171,770 $173,645,460 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 22,829 $ 170,568 Partners' equity (deficit) (Note 4): Limited Partners 105,502,002 172,409,394 (12,770,261 Limited Partner interests outstanding) General Partners (148,663) (78,838) Unrealized gain on MBS 795,602 1,144,336 Total Partners' equity 106,148,941 173,474,892 Total liabilities and Partners' equity $106,171,770 $173,645,460 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 Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 Revenues: Interest income - PIMs: Base interest $1,505,670 $2,517,455 $4,854,451 $7,720,452 Participation interest 1,062,400 183,527 1,630,937 1,311,716 Interest income - MBS 324,693 628,174 1,390,987 1,913,740 Interest income - other 140,906 60,661 589,360 219,775 Total revenues 3,033,669 3,389,817 8,465,735 11,165,683 Expenses: Asset management fee to an affiliate 179,354 308,040 590,297 931,286 Expense reimbursements to affiliates 19,329 33,939 25,144 95,410 Amortization of prepaid expenses and fees 300,479 340,752 1,758,364 1,296,153 General and administrative 42,368 35,491 159,118 158,902 Total expenses 541,530 718,222 2,532,923 2,481,751 Net income 2,492,139 2,671,595 5,932,812 8,683,932 Net unrealized gain (loss) on MBS 158,944 548,336 (348,734) 945,717 Total comprehensive income $2,651,083 $3,219,931 $5,584,078 $9,629,649 Allocation of net income (Note 4): Limited Partners $2,417,376 $2,591,447 $5,754,828 $8,423,414 Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .19 $ .20 $ .45 $ .66 General Partners $ 74,763 $ 80,148 $ 177,984 $ 260,518 /TABLE> The accompanying notes are an integral part of the financial statements. TABLE> KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1998 1997 Operating activities: Net income $5,932,812 $ 8,683,932 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid expenses and fees 1,758,364 1,296,153 Prepayment premium (1,017,166) (679,193) Changes in assets and liabilities: Decrease in interest receivable and other assets 321,776 139,576 Increase (decrease) in liabilities (147,739) 144,558 Net cash provided by operating activities 6,848,047 9,585,026 Investing activities: Principal collections on PIMs including prepayment premium of $1,005,466 in 1998 and $679,193 in 1997, respectively 29,722,247 8,997,593 Principal collections on MBS including a prepayment premium of $11,700 in 1998 11,903,425 1,263,198 Net cash provided by investing activities 41,625,672 10,260,791 Financing activities: Special distributions (63,978,509)(11,775,807) Quarterly distributions (8,931,520 (8,300,605) Net cash used for financing activities (72,910,029)(20,076,412) Net decrease in cash and cash equivalents (24,436,310) (230,595) Cash and cash equivalents, beginning of period 35,473,221 4,666,597 Cash and cash equivalents, end of period $11,036,911 $ 4,436,002 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, 1997 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners of the Partnership, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Partnership's financial position as of September 30, 1998, its results of operations for the three and nine months ended September 30, 1998 and 1997, and its cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 30, 1998 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 On September 23, 1998 the Partnership received a prepayment of the Woodbine Apartment's PIM in the amount of $4,180,266, representing the outstanding principal balance plus a prepayment premium of $376,224 and shared interest income of $109,939. On October 15, 1998, the Partnership also received a prepayment of the Ironwood Apartments PIM in the amount of $4,844,000 plus a prepayment premium of $325,000 and shared interest income of $226,507, which was received in September 1998. The Partnership will make special distribution of $.76 per Limited Partner interest from these prepayments during the fourth quarter. On June 15, 1998, the Partnership received a prepayment of the Sundance Apartments PIM in the amount of $7,187,778, representing the outstanding principal balance. The property had been operating under a modification agreement with the Partnership; consequently no prepayment premium or participation income was due at the time of the prepayment. The Partnership distributed the capital transaction proceeds from this prepayment to investors through a special distribution on July 24, 1998 in the amount of $.56 per Limited Partner interest. On February 17, 1998, the Partnership received a prepayment of the Rosewood Apartments PIM in the amount of $5,047,132 representing the outstanding principal balance. In addition, during January 1998 the Partnership received minimum additional interest and shared interest income of $151,263 and a prepayment premium of $304,242. The Partnership distributed the capital transaction proceeds from this prepayment to investors through a special distribution on April 13, 1998 in the amount of $.42 per Limited Partner interest. In January 1998, the Partnership received proceeds from the Fourth Ward Square and Meredith Square Apartment PIM prepayments in the amounts of $7,067,690 and $4,688,895 respectively. In addition, during December continued KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued 2. PIMs, continued 1997 the Partnership received $302,813 of minimum additional interest and shared interest income earned on property operations for these properties, a $422,001 prepayment premium 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 on February 27, 1998 in the amount of $1.01 per Limited Partner interest. In January 1998, the Partnership made a $2.30 per Unit special distribution with the prepayment proceeds of the Paddock Park II, Paddock Club Tallahassee and Paddock Club Jacksonville PIMs, which were received during the fourth quarter of 1997. At September 30, 1998, the Partnership's PIM portfolio has a fair value of $76,489,009 and gross unrealized gains and losses of $1,096,627 and $56,732, respectively. The PIM portfolio has maturities ranging from 1999 to 2032. At June 30, 1998 there are no insured mortgage loans within the Partnership's portfolio that are delinquent with respect to principal or interest payments. 3. MBS On June 19, 1998, the Partnership received a prepayment of the Brookside MBS in the amount of $2,944,531, representing the outstanding principal balance and a prepayment premium of $11,700. On April 24, 1998, the Partnership received a prepayment of the Regency Park MBS in the amount of $6,232,557, representing the outstanding principal balance. The Partnership distributed the capital proceeds from these transactions on July 24, 1998 in the form of a special distribution of $.72 per Limited Partner interest. At September 30, 1998, the Partnership's MBS portfolio has an amortized cost of $16,184,396 and gross unrealized gains of $795,602. The Partnership's MBS have maturities ranging from 2010 to 2035. In June 1997, Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' (FASB 130), was issued establishing standards for reporting and displaying comprehensive income and its components effective January 1, 1998. FASB 130 requires comprehensive income and its components, as recognized under accounting standards, to be displayed in a financial statement with the same prominence as other financial statements, if material. Accordingly, unrealized gains (losses) on the Partnership's available-for sale securities have been included in other comprehensive income. continued KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the six months ended September 30, 1998 is as follows: Total Limited General Unrealized Partners' Partners Partners Gain Equity Balance at December 31, 1997 $172,409,394 $(78,838) $1,144,336 $173,474,892 Net income 5,754,828 177,984 - 5,932,812 Quarterly distributions (8,683,711) (247,809) - (8,931,520) Special distributions (63,978,509) - - (63,978,509) Change in unrealized gain on MBS - - (348,734) (348,734) Balance at September 30, 1998 $105,502,002 $(148,663) $795,602 $106,148,941 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. The General Partners of the Partnership have conducted an assessment of the Partnership's core internal and external computer information systems and have taken the further necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. In this regard, the General Partners of the Partnership, along with certain affiliates, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The General Partners completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the General Partners have generated operating efficiencies and believe their financial accounting operating systems are Year 2000 ready. The Partnership incurred hardware costs as well as consulting and other expenses related to the infrastructure and facilities enhancements necessary to complete the upgrade and prepare for the Year 2000. There are no other systems or software that the Partnership is using at the present time. The General Partners of the Partnership are in the process of evaluating the potential adverse impact that could result from the failure of material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors to be Year 2000 ready. No estimate can be made at this time as to the impact of the readiness of such third parties. Liquidity and Capital Resources The most significant demand on the Partnership's liquidity are quarterly distributions paid to investors of approximately $2.4 million. Funds used for investor distributions come from interest received on the PIMs, MBS, cash and cash equivalents net of operating expenses and principal collections received on the PIMs and MBS. The Partnership funds a portion of the distributions 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 adjustments to the quarterly distributions paid to investors. During the nine months ended September 30, 1998, the Partnership has made four special distributions. Another special distribution is planned for the fourth quarter of 1998 in the amount of $.76 per Limited Partner interest resulting from the Woodbine and Ironwood Apartment's PIMs prepayments. During January, the Partnership paid out $2.30 per Limited Partner interest, which represented the principal proceeds and prepayment penalties received in the fourth quarter of 1997 from the three Paddock property PIMs. During February, the Partnership paid out $1.01 per Limited Partner interest, which represented the principal proceeds from Fourth Ward Square and Meredith Square PIMs, the prepayment premium from Meredith Square and the Shared Appreciation Interest from Fourth Ward Square. During April, the Partnership paid out $.42 per Limited Partner interest, which represented the principal proceeds and prepayment premium received from the Rosewood PIM prepayment. In July 1998, the Partnership paid out a special distribution of $1.28 per Limited Partner interest relating to the payoffs of the Sundance Apartment PIM and the Regency Park and Brookside MBS'. As a result of the above mentioned PIM prepayments, the Partnership's capital resources and its future cash flows will be lower. However, at this time the General Partners have determined that the Partnership can maintain its current dividend rate of $.76 per unit per year for the near future. 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 of cash available for distribution. To the extent quarterly distributions differ from cash available for distribution, the General Partners may adjust the distribution rate or distribute funds through a special distribution. In the event of additional PIM prepayments the Partnership would be required to distribute any proceeds from the prepayments as a special distribution which may cause an adjustment to the distribution rate to reflect the anticipated future cash inflows from the remaining mortgage investments. The General Partners have been informed by the borrower of the Windsor Court Apartment's PIM that the first mortgage loan underlying the PIM may be prepaid prior to the end of the year. If this transaction takes place, the Partnership would receive unpaid participation interest earned on prior years operations and either its share of any interest in the value of the property or a prepayment premium. 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 a 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 Fannie Mae, the Federal Home Loan Mortgage Corporation (AFHLMC@), the Government National Mortgage Association (AGNMA@) and the Department of Housing and Urban Development (AHUD@) and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represent interests in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government. Operations The following discussion relates to the operations of the Partnership during the three and nine months ended September 30, 1998 and 1997: Net income decreased for the three months ended September 30, 1998 as compared to the same period in 1997. This decrease was due primarily to lower base interest on PIMs and interest income on MBS. This was partially offset by increases in interest income on cash and cash equivalents and participation interest and a decrease in asset management fees. The significant decrease in base interest on PIMs was caused by the prepayments of the Sundance, Meredith Square, Fourth Ward Square and Rosewood Apartment PIMs during the first nine months of 1998 and the three Paddock PIMs in the fourth quarter of 1997. The increase in participation interest was a result of the Partnership receiving prepayment penalties and shared interest income from the Woodbine and Ironwood Apartment PIMs prepayments along with shared interest income and minimum additional interest from the Marina Shores Apartment PIMs. The decrease in asset management fees was a result of the 1998 PIM prepayments mentioned above that reduced the asset base. The decrease in MBS interest income was primarily due to the prepayment of the Brookside and Regency Park MBS' during the first half of 1998. The increase in interest income on cash and cash equivalents was due to the Partnership having higher average short-term investment balances during the three months ended September 30, 1998 when compared to the corresponding period in 1997. Net income decreased for the nine months ended September 30, 1998 as compared to the same period in 1997. This decrease was due primarily to lower base interest on PIMs and interest income on MBS. This was partially offse by increases in interest income on cash and cash equivalents and participation interest and a decrease in asset management fees. The significant decrease in base interest on PIMs was caused by the prepayments of the Sundance, Meredith Square, Fourth Ward Square, Rosewood and Woodbine Apartment PIMs during the first nine months of 1998 and the three Paddock PIMs in the fourth quarter of 1997. The increase in participation interest was a result of the Partnership receiving prepayment penalties and shared interest income from the Woodbine, Ironwood and Rosewood Apartment PIMs along with shared interest income from the Marina Shores and Windsor Court Apartment PIMs and a prepayment premium from the Brookside MBS. The decrease in asset management fees was a result of a reduction in asset base occuring from the prepayments mentioned above plus the three Paddock PIMs which prepaid in the fourth quarter of 1997. The decrease in MBS interest income was primarily due to the prepayment of the Brookside and Regency Park MBS' during the first half of 1998. The increase in interest income on cash and cash equivalents was due to the Partnership having higher average short-term investment balances during the nine months ended September 30, 1998 when compared to the corresponding period in 1997. The increase in amortization of prepaid fees and expenses is due to the Partnership fully amortizing the remaining costs associated with the Regency Park and Brookside MBS', and the Woodbine, Fourth Ward Square, Meredith Square Rosewood and Sundance Apartment PIMs. Expense reimbursements to affiliates decreased during the nine months ended September 30, 1998 due to the Partnership having received a rebate for expense reimbursements related to 1997. The Partnership funds a portion of distributions with MBS and PIM principal collections, which reduce the invested assets generating interest income for the Partnership. As the invested assets decline so will interest income on MBS, base interest income on PIMs and other interest income. 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 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: October 28, 1998