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 June 30, 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 (IRS employer identification no.) of incorporation or organization) 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 June 30, December 31, 1999 1998 Participating Insured Mortgages ("PIMs")(Note 2) $ 59,282,932 $ 70,497,441 Mortgage-Backed Securities and insured mortgages ("MBS")(Note 3) 14,139,557 15,598,230 Total mortgage investments 73,422,489 86,095,671 Cash and cash equivalents 5,799,430 6,845,229 Interest receivable and other assets 503,748 588,019 Prepaid acquisition fees and expenses, net of accumulated amortization of $3,781,289 and $4,339,027, respectively 1,002,033 1,300,234 Prepaid participation servicing fees, net of accumulated amortization of $1,132,505 and $1,317,338, respectively 372,702 471,528 Total assets $ 81,100,402 $ 95,300,681 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 9,132 $ 161,439 Partners' equity (deficit) (Note 4): Limited Partners (12,770,261 Limited Partner interests outstanding) 81,117,480 94,969,742 General Partners (186,458) (157,989) Accumulated comprehensive income 160,248 327,489 Total Partners' equity 81,091,270 95,139,242 Total liabilities and Partners' equity $ 81,100,402 $ 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 For the Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 Revenues: Interest income - PIMs: Basic interest $ 1,150,206 $ 1,640,321 $ 2,307,089 $ 3,348,781 Participation income - 113,032 - 568,537 Interest income - MBS 274,444 516,559 563,048 1,066,294 Interest income - other 74,364 243,968 201,290 448,454 Total revenues 1,499,014 2,513,880 3,071,427 5,432,066 Expenses: Asset management fee to an affiliate 137,441 195,069 274,753 410,943 Expense reimbursements to affiliates 23,151 (28,124) 28,160 5,815 Amortization of prepaid fees and expenses 152,822 644,134 397,027 1,457,885 General and administrative 47,337 72,604 64,123 116,750 Total expenses 360,751 883,683 764,063 1,991,393 Net income 1,138,263 1,630,197 2,307,364 3,440,673 Other comprehensive income: Net change in unrealized gain on MBS (148,177) (482,632) (167,241) (507,678) Total comprehensive income $ 990,086 $ 1,147,565 $ 2,140,123 $ 2,932,995 Allocation of net income (Note 4): Limited Partners $ 1,104,115 $ 1,581,291 $ 2,238,143 $ 3,337,453 Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .09 $ .12 $ .18 $ .26 General Partners $ 34,148 $ 48,906 $ 69,221 $ 103,220 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1999 1998 Operating activities: Net income $ 2,307,364 $ 3,440,673 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 397,027 1,457,885 Prepayment premium - (315,942) Changes in assets and liabilities: Decrease in interest receivable and other assets 84,271 255,646 Decrease in liabilities (152,307) (154,900) Net cash provided by operating activities 2,636,355 4,683,362 Investing activities: Principal collections on PIMs including prepayment premium of $304,242 in 1998. 11,214,509 24,724,820 Principal collections on MBS including a prepayment premium of $11,700 in 1998 1,291,432 10,775,749 Net cash provided by investing activities 12,505,941 35,500,569 Financing activities: Special distributions (11,237,745) (47,632,702) Quarterly distributions (4,950,350) (6,437,313) Net cash used for financing activities (16,188,095) (54,070,015) Net decrease in cash and cash equivalents (1,045,799) (13,886,084) Cash and cash equivalents, beginning of period 6,845,229 35,473,221 Cash and cash equivalents, end of period $ 5,799,430 $ 21,587,137 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 June 30, 1999, its results of operations for the three and six months ended June 30, 1999 and 1998, and its cash flows for the six months ended June 30, 1999 and 1998. The results of operations for the three and six months ended June 30, 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 premiums 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 June 30, 1999, the Partnership's PIM portfolio has a fair value of approximately $60,133,796 and gross unrealized gains and losses of $930,082 and $79,218, respectively. The PIM portfolio has maturities ranging from 2000 to 2032. 3. MBS At June 30, 1999, the Partnership's MBS portfolio has an amortized cost of $13,979,309 and gross unrealized gains and losses of $191,492 and $31,244 respectively. The Partnership's MBS have maturities ranging from 2016 to 2035. At June 30, 1999, the Partnership's insured mortgage loan was not delinquent with respect to principal or interest payments. 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 June 30, 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 2,238,143 69,221 - 2,307,364 Special distributions (11,237,745) - - (11,237,745) Distributions (4,852,660) (97,690) - (4,950,350) Increase in unrealized gain on MBS - - (167,241) (167,241) Balance at June 30, 1999 $ 81,117,480 $ (186,458) $ 160,248 $ 81,091,270 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 surveyed the Partnership's material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors and received assurances that such service providers and vendors are Year 2000 ready. The Partnership does not anticipate any problems that would materially impact its results of operations, liquidity or capital resources. Nevertheless the General Partners are developing contingency plans for all of their "mission-critical functions" to insure business continuity. 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. However, the General Partners do not anticipate any material impact on the Partnership's results of operations, liquidity or capital resources. 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. 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. 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 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, Shared Appreciation Interest and prepayment premium from the Windsor Court Apartment PIM. 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 (FHLMC), the Government National Mortgage Association (GNMA) and the Department of Housing and Urban Development (HUD) and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. 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 six months ended June 30, 1999 and 1998: Net income decreased by approximately $492,000 and $1,133,000 during the three and six months ended June 30, 1999 as compared to the corresponding periods in 1998. Basic interest declined during the three and six months ended June 30, 1999 as compared to the three and six months ended June 30, 1998 due primarily to prepayments of the Sundance, Meredith Square, Fourth Ward Square, Rosewood, Woodbine and Ironwood PIMs in 1998 and the Windsor Court PIM in January 1999. Participation income was higher in 1998 as compared to 1999 due to prepayment premiums of $304,000 and $12,000 from the Rosewood PIM and Brookside MBS prepayments, respectively, and additional interest of $152,000 and $101,000 from the Rosewood and Windsor Court PIMs, respectively. The decrease in interest income on MBS in 1999 versus 1998 was caused by the prepayments of the Regency Park and Brookside MBS in April and June of 1998, respectively, and the on-going principal collections on the single-family MBS. Other interest income decreased in 1999 as compared to 1998 due to significantly lower cash balances available for short-term investing. The higher amortization expense in 1998 versus 1999 was caused by fully amortizing the remaining prepaid fees and expenses of the Regency Park MBS and the Rosewood and Sundance PIMs. Asset management fees also decreased due to the prepayments discussed above and will continue to decline as principal collections and any prepayments reduce the Partnership's investments in mortgages. 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 invested assets decline so will interest income on MBS, basic interest 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 of 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: August 5, 1999