UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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 identification no.)
incorporation or organization)
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One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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
March 31, December 31,
1999 1998
Participating Insured Mortgages
("PIMs")(Note 2) $ 59,362,179 $ 70,497,441
Mortgage-Backed Securities and insured
mortgages ("MBS")(Note 3) 14,931,243 15,598,230
Total mortgage investments 74,293,422 86,095,671
Cash and cash equivalents 6,548,451 6,845,229
Interest receivable and other assets 505,038 588,019
Prepaid acquisition fees and expenses, net of
accumulated amortization of $3,666,507 and
$4,339,027, respectively 1,116,815 1,300,234
Prepaid participation servicing fees, net of
accumulated amortization of $1,094,465 and
$1,317,338, respectively 410,742 471,528
Total assets $ 82,874,468 $ 95,300,681
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 304,556 $ 161,439
Partners' equity (deficit) (Note 4):
Limited Partners
(12,770,261 Limited Partner interests
outstanding) 82,439,694 94,969,742
General Partners (178,207) (157,989)
Accumulated comprehensive income 308,425 327,489
Total Partners' equity 82,569,912 95,139,242
Total liabilities and Partners' equity $ 82,874,468 $ 95,300,681
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months
Ended March 31,
1999 1998
Revenues:
Interest income - PIMs:
Basic interest $ 1,156,883 $ 1,708,460
Participation income - 455,505
Interest income - MBS 288,604 549,735
Interest income - other 126,926 204,486
Total revenues 1,572,413 2,918,186
Expenses:
Asset management fee to an affiliate 137,312 215,874
Expense reimbursements to affiliates 5,009 33,939
Amortization of prepaid fees and expenses 244,205 813,751
General and administrative 16,786 44,146
Total expenses 403,312 1,107,710
Net income 1,169,101 1,810,476
Comprehensive income:
Net change in unrealized gain on MBS (19,064) (25,046)
Total comprehensive income $ 1,150,037 $ 1,785,430
Allocation of net income (Note 4):
Limited Partners $ 1,134,028 $ 1,756,162
Average net income per Limited Partner
interest (12,770,261 Limited Partner
interests outstanding) $ .09 $ .14
General Partners $ 35,073 $ 54,314
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
1999 1998
Operating activities:
Net income $1,169,101 $1,810,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid fees and expenses 244,205 813,751
Prepayment penalty income - (304,242)
Changes in assets and liabilities:
Decrease in interest receivable and other assets 82,981 177,284
Increase (decrease) in liabilities 143,117 (145,819)
Net cash provided by operating activities 1,639,404 2,351,450
Investing activities:
Principal collections on PIMs including prepayment
penalty income of $304,242 in 1998 11,135,262 17,415,151
Principal collections on MBS 647,923 593,260
Net cash provided by investing activities 11,783,185 18,008,411
Financing activities:
Quarterly distributions (2,481,622) (3,941,380)
Special distributions (11,237,745) (42,269,234)
Net cash used for financing activities (13,719,367) (46,210,614)
Net decrease in cash and cash equivalents (296,778) (25,850,753)
Cash and cash equivalents, beginning of period 6,845,229 35,473,221
Cash and cash equivalents, end of period $6,548,451 $9,622,468
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, 1998 for additional information relevant to
significant accounting policies followed by the Partnership.
In the opinion of the General Partners of the Partnership, the accompanying
unaudited financial statements reflect all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the Partnership's
financial position as of March 31, 1999 and its results of operations and cash
flows for the three months ended March 31, 1999 and 1998.
The results of operations for the three months ended March 31, 1999 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
In January 1999, the Partnership received a prepayment of the Windsor Court
Apartments PIM in the amount of $10,876,051 representing the outstanding
principal balance. In addition to the prepayment, the Partnership received
$243,620 of Shared Appreciation Interest and prepayment penalties and $196,828
of Minimum Additional Interest and Shared Income Interest during December 1998.
The partnership distributed the capital transaction proceeds from this
prepayment to the Limited Partners through a special distribution on February
26, 1999 in the amount of $.88 per limited partner interest.
At March 31, 1999, the Partnership's PIM portfolio has a fair market value
of approximately $61,456,000 and gross unrealized gains of $2,094,000. The PIM
portfolio has maturities ranging from 2000 to 2032.
3. MBS
At March 31, 1999, the Partnership's MBS portfolio has an amortized cost of
$14,622,818 and gross unrealized gains of $308,425. The Partnership's MBS have
maturities ranging from 2016 to 2035.
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 three months ended March 31,
1999 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
Balance at
December 31, 1998 $94,969,742 $(157,989) $ 327,489 $95,139,242
Net income 1,134,028 35,073 - 1,169,101
Special distributions (11,237,745) - - (11,237,745)
Quarterly distributions (2,426,331) (55,291) - (2,481,622)
Change in unrealized
gain on MBS - - (19,064) (19,064)
Balance at March 31, 1999 $82,439,694 $(178,207) $ 308,425 $82,569,912
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
General Partners of 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 significant internal 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. The
General Partners of the Partnership are in the process of surveying these third
party providers and assessing their readiness with year 2000. To date, the
Partnership is not aware of any problems that would materially impact its
results of operations, liquidity or capital resources. However, the Partnership
has not yet obtained all written assurances that these providers would be Year
2000 ready.
The Partnership currently does not have a contingency plan in the event of
a particular provider or system not being Year 2000 ready. Such plan will be
developed if it becomes clear that a provider is not going to achieve its
scheduled readiness objectives by June 30, 1999. The inability of one of these
providers to complete its Year 2000 resolution process could impact the
Partnership. In addition, the Partnership is also subject to external forces
that might generally affect industry and commerce, such as utility and
transportation company Year 2000 readiness failures and related service
interruptions. To date, the Partnership has not incurred any cost associated
with being Year 2000 ready. All costs have been incurred by the General
Partners, and it is estimated that any future Year 2000 readiness costs will be
borne by the General Partners. 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 demands 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 certain principal collections
received on the PIMs and MBS. The Partnership funds a portion of the quarterly
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.
The General Partners periodically review the distribution rate to determine
whether an adjustment to the distribution rate is necessary based on projected
future cash flows. In general, the General Partners try to set a distribution
rate that provides for level quarterly distributions of cash available for
distribution. To the extent quarterly distributions differ from the cash
available for distribution the General Partners may adjust the distribution rate
or distribute funds through a special distribution.
In February 1999, the Partnership paid out $.88 per Limited Partner
interest, which represented the principal proceeds and prepayment penalty from
the Windsor Court Apartments PIMs.
The General Partners estimate that the Partnership can maintain the
quarterly distribution rate of $.19 per limited partner interest for the near
future. However, in the event of further 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 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
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.
The Partnership includes in cash and cash equivalents approximately $6.0
million of commercial paper, which is issued by entities with a credit rating
equal to one of the top two rating categories of a nationally recognized
statistical rating organization.
Operations
The following discussion relates to the operations of the Partnership
during the three months ended March 31, 1999 and 1998:
Net income decreased by $641,000 during the three months ended March 31,
1999 as compared to the three months ended March 31, 1998. This decrease was
primarily due to a $552,000 decrease in basic interest on PIMs, a $456,000
decrease in participation income on PIMs and a $261,000 decrease in MBS interest
income net of a $570,000 decrease in amortization of prepaid fees and expenses.
Basic interest on PIMs decreased due to the prepayment of Windsor Court in
January 1999 and the prepayment of Sundance, Meredith Square, Fourth Ward
Square, Rosewood, Woodbine, and Ironwood during 1998. Participation income on
PIMs decreased as the Partnership did not receive any participation income
during the first quarter of 1999 but received $456,000 from the payoff of
Rosewood in January 1998. MBS interest income decreased due to the payoff of the
Brookside multi-family MBS in 1998 along with the on-going receipt of
prepayments on the Partnership's single-family MBS. Amortization of prepaid fees
and expenses decreased as the Partnership had fully amortized the prepaid fees
and expenses related to Fourth Ward Square, Meredith Square and Rosewood during
the first quarter of 1998 which increased that period's expense.
The Partnership funds a portion of its distributions with MBS and PIM
principal collections, which reduces the invested assets generating 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: April 23, 1999