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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3007489
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 523-0066
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. / /.
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes / / No /X/
Aggregate market value of voting securities held by non-affiliates: Not
applicable.
Documents incorporated by reference: see Item 15
The exhibit index is located on pages 10-11.
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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 (the "insured mortgage") guaranteed as to principal and basic
interest and a participation feature that is not insured nor guaranteed. The
insured mortgages were issued or originated under or in connection with the
housing programs of the Government National Mortgage Association ("GNMA") or
Fannie Mae. 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 has investments in MBS collateralized by single-family or
multi-family mortgage loans issued or originated by Fannie Mae, the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal Housing Administration
("FHA"). Fannie Mae and FHLMC guarantee the principal and basic interest of the
Fannie Mae and FHLMC MBS, respectively. The Department of Housing and Urban
Development ("HUD") insures the FHA mortgage loan.
The Partnership must distribute proceeds received from prepayments or other
realization of the mortgages 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 cannot be predicted. Such factors include interest
rate fluctuations and the credit worthiness of Fannie Mae, GNMA, 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 Partnership anticipates there will be sufficient cash flow from the
mortgages to meet cash requirements. To the extent that the Partnership's cash
flow should be insufficient to meet the Partnership's operating expenses and
liabilities, it will be necessary for the Partnership to obtain additional funds
by liquidating its investment in one or more mortgages or by borrowing. The
Partnership may borrow money on an unsecured or secured basis to further the
purposes of the Partnership. The Partnership may pledge mortgages as security
for any permitted borrowing. The Partnership, under some circumstances, may
borrow funds from any general partner or an affiliate of any general partner.
However, the transaction must include interest rates and other finance charges
and fees not in excess of the amounts that are charged by unaffiliated lenders
for comparable loans and must satisfy other conditions specified in the
partnership agreement. The Partnership has not borrowed any funds during the
past and does not intend to do so in the future.
The FHA coinsurance loan program under Section 221(d)(4) of the National Housing
Act provides for loans with 40 year terms. However, this program allows for a
call option at any time after ten years, upon one year's notice. The
subordinated promissory note and subordinated mortgage that secure the
participation feature of the GNMA PIM provides for acceleration of maturity at
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the earlier of the sale of the underlying property or the call date, typically
expected to be a date ten years after the date of the final endorsement for
mortgage insurance.
From time to time, the Partnership expects that it may realize the principal and
participation in residual value, if any, of its mortgage before maturity. It was
expected that the mortgages would be repaid after a period of ownership of
approximately ten years from the dates of the closings of the permanent loans.
Realization of the value of mortgages may, however, be at a later date.
The Partnership will not underwrite securities of other insurers, offer
securities in exchange for property, invest in securities of other insurers for
the purpose of exercising control or issue senior securities and has not engaged
in any of these actives during the past. The Partnership has not repurchased or
reacquired any of the partner interest from partners or units from unit holders
in the past and does not intend to do so in the future. The Partnership may not
make loans to any general partner or any affiliate of any general partner and
will not make loans to any other persons, other than mortgage investments of the
type described above.
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, 2001, 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, 2001 was approximately
9,900. 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 July 2001, the Partnership made a special distribution of $0.53 per
Limited Partner interest from the principal proceeds, Shared Appreciation
Interest and Minimum Additional Interest from the Casa Marina PIM.
During January 2000, the Partnership made a special distribution of $1.17 per
Limited Partner interest from the principal proceeds from the Marina Shores PIM.
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.
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The Partnership made the following distributions, in quarterly installments, and
special distributions, to its Partners during the two years ended December 31,
2001 and 2000:
<Table>
<Caption>
2000 2001
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Average Average
Amount Per Unit Amount Per Unit
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Quarterly Distributions
Limited Partners $ 4,086,451 $ .32 $ 6,895,888 $ .54
General Partners 95,244 - 108,116 -
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4,181,695 7,004,004
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Special Distributions
Limited Partners 6,768,186 $ .53 14,941,091 $ 1.17
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Total Distributions $ 10,949,881 $ 21,945,095
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</Table>
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 which are
included in Item 7 and Item 8, (Appendix A) of this report, respectively.
<Table>
<Caption>
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total revenues $ 3,531,049 $ 3,998,335 $ 6,770,135 $ 10,782,454 $ 18,896,423
Net income 2,763,540 2,993,654 4,930,576 7,713,323 14,893,523
Net income allocated to:
Limited Partners 2,680,634 2,903,844 4,782,659 7,481,923 14,446,717
Average per Unit .21 .23 .37 .59 1.13
General Partners 82,906 89,810 147,917 231,400 446,806
Total assets at
December 31 41,417,200 49,584,641 68,426,507 95,300,681 173,645,460
Distributions to:
Limited Partners 4,086,451 6,895,888 9,705,323 11,110,042 15,324,194
Average per Unit .32 .54 .76 .87 1.20
Special 6,768,186 14,941,091 21,453,869 73,811,533 11,237,742
Average per Unit .53 1.17 1.68 5.78 .88
General Partners 95,244 108,116 177,147 310,551 373,032
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the Partnership's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors include, among other
things, federal, state or local regulations; adverse changes in general economic
or local conditions; pre-payments of mortgages; failure of borrowers to pay
participation interests due to poor operating results at properties underlying
the mortgages; uninsured losses and potential conflicts of interest between the
Partnership and its Affiliates, including the General Partners.
LIQUIDITY AND CAPITAL RESOURCES
The most significant demands on the Partnership's liquidity are the regular
quarterly distributions paid to investors, which are approximately $1.0 million
each quarter. Funds for investor distributions come from the monthly principal
and basic interest payments received on the PIMs and MBS, the principal
prepayments of the PIMs and MBS, and interest earned on the Partnership's cash
and cash equivalents. 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 that quarterly distributions do not fully utilize
the cash available for distributions and cash balances increase, the General
Partners may adjust the distribution rate or distribute such funds through a
special distribution. The portion of distributions attributable to the principal
collections reduces the capital resources of the Partnership. As the capital
resources decrease, the total cash flows to the Partnership also will decrease
and over time will result in periodic adjustments to the 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. Based on current projections, the General Partners expect that the
Partnership will reduce the distribution rate of $0.08 per Limited Partner
interest per quarter to $.04 per Limited Partner interest per quarter with the
May 2002 distribution.
In addition to providing insured or guaranteed monthly principal and basic
interest payments, the Partnership's PIM investments also may provide additional
income through its participation feature in the underlying properties if they
operate successfully. The Partnership may receive a share in any operating cash
flow that exceeds debt service obligations and capital needs or a share in any
appreciation in value when the properties are sold or refinanced. However, this
participation is neither guaranteed nor insured, and it is dependent upon
whether property operations or its terminal value meet certain criteria.
The Partnership received a prepayment of the Royal Palm Place Subordinate
Promissory note. On January 2, 2002, the Partnership received $1,004,379 of
Shared Appreciation Interest and $322,401 of Minimum Additional Interest. On
February 25, 2002, the Partnership received $14,764,062 representing the
principal proceeds on the first mortgage. The Partnership has declared a special
distribution of $1.24 per Limited Partner interest consisting of Shared
Appreciation Interest and prepayment proceeds which will be paid in the first
quarter of 2002.
During June 2001, the Partnership received a payoff of the Casa Marina PIM in
the amount of $6,727,016. In addition, the Partnership received $15,000 of
Shared Appreciation Interest and $10,000 of Minimum Additional Interest upon the
payoff of the underlying mortgage. On July 18, 2001, the Partnership paid a
special distribution of $.53 per Limited Partner interest from the principal
proceeds and Shared Appreciation received from Casa Marina.
During January 2000, the Partnership paid a special distribution of $1.17 per
Limited Partner interest consisting of principal proceeds and Shared
Appreciation Interest in the amounts of $14,491,746 and $426,321, respectively
from the Marina Shores Apartments PIM payoff in December of 1999.
The Partnership made two special distributions during 1999 as a result of the
following PIM prepayments: In February 1999, an $.88 per Limited Partner
interest special distribution consisting of the prepayment proceeds in the
amount of $10,876,051 and Shared Appreciation Interest and prepayment premium of
$243,620 from the Windsor Court PIM that were received in January 1999. In
September 1999, an $.80 per Limited Partner interest special distribution was
made consisting of the prepayment proceeds in the amount of $9,751,550 and
Shared Appreciation Interest of $402,508 from the Mill Ponds PIM that were
received during the third quarter of 1999.
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With the payoff of the Royal Palm Place PIM in January 2002, the Partnership's
only remaining PIM investment is backed by the first mortgage loan on Harbor
Club. Presently, the General Partners do not expect Harbor Club to pay the
Partnership any participation interest or to be sold or refinanced during 2002.
However, if favorable market conditions provide the borrower an opportunity to
sell the property, there are no contractual obligations remaining that would
prevent a prepayment of the underlying first mortgage. Harbor Club operates
successfully in Ann Arbor, Michigan, which is a very competitive market with
many newer apartment properties. Although Harbor Club has maintained occupancy
rates in the mid 90% range for the past two years, most cash flow generated by
the property is used for capital replacements and improvements that help it
maintain its strong market position.
The Partnership has the option to call its remaining PIM by accelerating the
maturity of the loan. If the call feature is exercised for both the
participation feature and the MBS security portion of the PIM then the insurance
feature of the loan would be canceled. Therefore, the Partnership will determine
the merits of exercising the call option as economic conditions warrant. Such
factors as the condition of the asset, local market conditions, the interest
rate environment and availability of financing will affect this decision.
CRITICAL ACCOUNTING POLICY
The Partnership's critical accounting policy relates primarily to revenue
recognition related to the participation feature of the Partnership's PIM
investments. The Partnership's policy is as follows:
Basic interest on PIMs is recognized based on the stated coupon rate of the GNMA
or Fannie Mae MBS. The Partnership recognizes interest related to the
participation features when the amount becomes fixed and the transaction that
gives rise to such amount is finalized, cash is received and all
contingencies are resolved. This could be the sale or refinancing of the
underlying real estate, which results in a cash payment to the Partnership or
a cash payment made to the Partnership from surplus cash relative to the
participation feature.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSESSMENT OF CREDIT RISK
The Partnership's investments in its MBS portion of its PIM and its MBS are
guaranteed and/or insured by the GNMA, Fannie Mae, FHLMC 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.
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. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States with significant experience in mortgage securitizations. In
addition, their MBS instruments carry the highest credit rating given to
financial instruments. 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.
At December 31, 2001, the Partnership includes in cash and cash equivalents
approximately $1.6 million of commercial paper, which is issued by entities with
a credit rating equal to one of the top two rating categories of a nationally
recognized statistical rating organization.
INTEREST RATE RISK
The Partnership's primary market risk exposure is to interest rate risk, which
can be defined as the exposure of the Partnership's net income, comprehensive
income or financial condition to adverse movements in interest rates. At
December 31, 2001, the Partnerships PIMs, and MBS comprise the majority of the
Partnership's assets. Decreases in interest rates may accelerate the prepayment
of the Partnership's investments. The Partnership does not utilize any
derivatives or other instruments to manage this risk as the Partnership plans to
hold its PIM investments to expected maturity, while it is expected that
substantially all of the MBS will prepay over the same time period, thereby
mitigating any potential interest rate risk to the disposition value of any
remaining MBS.
The Partnership monitors prepayments and considers prepayment trends, as well as
distribution requirements of the Partnership,
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when setting regular distribution policy. For MBS, the Partnership forecasts
prepayments based on trends in similar securities as reported by statistical
reporting entities such as Bloomberg. For PIMs, the Partnership incorporates
prepayment assumptions into planning as individual properties notify the
Partnership of the intent to prepay or as they are scheduled to mature.
The table below provides information about the Partnership's financial
instruments that are sensitive to changes in interest rates. For mortgage
investments, the table presents principal cash flows and related weighted
average interest rates ("WAIR") by expected maturity dates. The expected
maturity date is contractual maturity adjusted for expectations of prepayments.
<Table>
<Caption>
Expected maturity dates ($ in thousands)
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Total
Face Fair
2002 2003 2004 2005 2006 Thereafter Value Value(1)
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Interest-sensitive assets:
MBS $ 595 $ 515 $ 449 $ 394 $ 349 $ 8,992 $ 11,294 $ 11,629
WAIR 7.51% 7.51% 7.51% 7.51% 7.51% 7.51% 7.51%
PIMs 14,869 114 124 134 146 12,376 27,763 28,376
WAIR 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.2%
-------- -------- -------- -------- --------- ---------- --------- ----------
Total Interest-
sensitive assets $ 15,464 $ 629 $ 573 $ 528 $ 495 $ 21,368 $ 39,057 $ 40,005
======== ======== ======== ======== ========= ========== ========= ==========
</Table>
(1) The methodology used by the Partnership to estimate the fair value of each
class of financial instrument is described in Note H to the Partnership's
financial statements presented in Appendix A to this report. As described
in that note, the Partnership does not include an estimate of value for the
participation interest associated with its PIM investments.
RESULTS OF OPERATIONS
The following discussion relates to the operation of the Partnership during the
years ended December 31, 2001, 2000 and 1999.
<Table>
<Caption>
(Amounts in Thousands)
2001 2000 1999
------- -------- --------
Interest income on PIMs:
Basic interest $ 2,511 $ 2,755 $ 4,210
Participation interest 25 - 1,001
Interest income on MBS 894 965 1,071
Other interest income 101 278 488
Partnership expenses (553) (624) (732)
Amortization of prepaid fees
and expenses (214) (380) (1,107)
------- -------- --------
Net income $ 2,764 $ 2,994 $ 4,931
======= ======== ========
</Table>
Net income decreased during 2001 as compared to 2000 due primarily to decreases
in basic interest on PIMs and other interest income net of a decrease in
amortization expense. Basic interest on PIMs decreased primarily due to the
payoff of the Casa Marina PIM in the second quarter of 2001. The decrease is
partially offset by an increase in the interest rate for the Royal Palm Place
PIM as specified in the workout agreement. Other interest income decreased due
to lower average interest rates earned on cash balances available for short-term
investing during 2001, when compared to 2000. Amortization expense decreased due
to
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the full recognition of prepaid expenses relating to the Casa Marina and
Royal Palm Place PIMs during the second quarter of 2001.
Net income decreased during 2000 as compared to 1999 due primarily to lower
basic and participation interest on PIMs and lower other interest income net of
lower amortization expense. Basic interest on PIMs decreased due to the payoffs
of the Windsor Court, Mill Ponds Apartments and Marina Shores PIMs in 1999.
Participation income decreased in 2000 as a result of the PIM prepayments
mentioned above. The decrease in other interest income is primarily due to the
Partnership having lower average short-term investment balances during the
twelve months ended December 31, 2000 when compared to the corresponding period
in 1999. Amortization expense decreased due to the Partnership fully amortizing
the costs associated with the PIMs that were prepaid in 1999.
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:
<Table>
<Caption>
Position with
Name and Age Krupp Plus Corporation
------------ ----------------------
Douglas Krupp (55) President, Co-Chairman of the Board and Director
George Krupp (57) Co-Chairman of the Board and Director
Peter F. Donovan (48) Senior Vice President
Ronald Halpern (60) Senior Vice President
Carol J. C. Mills (52) Vice President
Robert A. Barrows (44) Vice President and Treasurer
</Table>
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer
of The Berkshire Group, an integrated real estate financial services firm
engaged in real estate acquisitions, property management, investment
sponsorship, venture capital investing, mortgage banking and financial
management, and ownership of two operating companies through private equity
investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire
Group was established as The Krupp Companies in 1969 and he has served as the
Chief Executive Officer since 1992. He is a graduate of Bryant College where he
received an honorary Doctor of Science in Business Administration in 1989.
George Krupp is the Co-Founder and Co-Chairman of The Berkshire Group, an
integrated real estate financial services firm engaged in real estate
acquisitions, property management, investment sponsorship, venture capital
investing, mortgage banking and financial management, and ownership of two
operating companies through private equity investments. Mr. Krupp has held the
position of Co-Chairman since The Berkshire Group was established as The Krupp
Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish
High School in Waltham, Massachusetts since September of 1997. Mr. Krupp
attended the University of Pennsylvania and Harvard University and holds a
Master's Degree in History from Brown University. Douglas and George Krupp are
brothers.
Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance which
position he has held since January of 1998
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and in this capacity, he oversees the strategic growth plans of this mortgage
banking firm. Berkshire Mortgage Finance is the 10th largest servicer of
commercial mortgage loans in the United States with a servicing and asset
management portfolio of $14.1 billion. Previously he served as President of
Berkshire Mortgage Finance from January of 1993 to January of 1998 and in that
capacity he directed the production, underwriting, 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. Mr. Donovan is currently a member of the Advisory
Council for Fannie Mae.
Ronald Halpern is President and COO of Berkshire Mortgage Finance. He has served
in these positions since January of 1998 and in this capacity, he is responsible
for the overall operations of the Company. Prior to January of 1998, he was
Executive Vice President, managing the underwriting, closing, portfolio
management and servicing departments for Berkshire Mortgage Finance. Before
joining the firm in 1987, he held senior management positions with the
Department of Housing and Urban Development in Washington D.C. and several HUD
regional offices. Mr. Halpern has over 30 years of experience in real estate
finance which includes his experience as prior Chairman of the MBA Multifamily
Housing Committee. He holds a B.A. degree from the University of the City of New
York and J.D. degree from Brooklyn Law School.
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 and treasury functions 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.
Carol J.C. Mills is Senior Vice President for Loan Management of Berkshire
Mortgage Finance and in this capacity, she is responsible for the Loan Servicing
and Asset Management functions of Berkshire Mortgage Finance. She manages the
estimated $14.1 billion portfolio of loans. Ms. Mills joined Berkshire in
December 1997 as Vice President and was promoted to Senior Vice President in
January 1999. From January 1989 through November 1997, Ms. Mills was Vice
President of First Winthrop Corporation and Winthrop Financial Associates, in
Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke College and a
Master of Architecture degree from Harvard University. Ms. Mills is a member of
the Real Estate Finance Association, New England Women in Real Estate and the
Mortgage Bankers Association. Ms. Mills is currently a member of the Servicing
Advisory Council for Freddie Mac.
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, 2001, no person owned of record or was known by the General
Partners to own beneficially more than 5% of the Partnership's 12,770,261
outstanding Limited Partner interests. The only interests held by management or
its affiliates consist of the 2.5% general partner interest held by Krupp Plus
Corporation, the 97.5% general partner interest held by Mortgage Services
Partners Limited Partnership and the 100 limited partner interests (0.0008% of
the total outstanding) held by Krupp Depositary Corporation, an affiliate of the
General Partners.
Under the terms of the Partnership Agreement, profits from Partnership
operations and Distributable Cash Flow are allocated 97% to the Unitholders 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 General Partners 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.
Upon the occurrence of a terminating capital transaction, as defined in the
Partnership Agreement, the net cash proceeds and
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winding up of the affairs of the Partnership will be allocated among the
Partners first, to each class of Partners in the amount equal to, or if less
than, in proportion to, the positive balance in the Partner's capital accounts,
second, to the Limited Partners until they have received a return of their total
invested capital, third, to the General Partners until they have received a
return of their total invested capital, fourth, 99% to the Limited Partners and
1% to the General Partners until the Limited Partners have received 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, fifth, to the
General Partners until they have received an amount equal to 4% of all amounts
of cash distributed under all capital transactions and sixth, 96% to the Limited
Partners and 4% to the General Partners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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
remaining face value of the Partnership's 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. During 2001, Mortgage
Services Partners Limited Partnership, a General Partner, received $318,136
related to the Asset Management Fee.
Additionally, the Partnership reimburses affiliates of the General Partners for
certain expenses incurred in connection with maintaining the books and records
of the Partnership, the preparation and mailing of financial reports, tax
information and other communications to the investors and legal fees and
expenses. During 2001, The Berkshire Companies Limited Partnership and Berkshire
Mortgage Finance Limited Partnership, affiliates of the General Partners,
received a total of $96,318 in reimbursements.
During 2001, the General Partners received distributions totaling $95,244
related to their 3% share of Distributable Cash Flow.
ITEM 14. CONTROLS AND PROCEDURES.
Not applicable.
ITEM 15. 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) REPORTS ON FORM 8-K
During the last quarter of the year ended December 31, 2001, the did not
file any reports on Form 8-K.
(c) 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
-10-
<Page>
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)].*
HARBOR CLUB APARTMENTS
(10.3) Prospectus for GNMA Pool No. 259237(CS) and 259238(PN).
[Exhibit 19.3 to Registrant's Report on Form 10-Q for the
quarter ended March 31,1990 (File No. 0-17691)].*
(10.4) 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 Registrant's
Report on Form 10-Q for the quarter ended March 31,1990
(File No. 0-17691)].*
ROYAL PALM PLACE
(10.5) 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)].*
(10.6) 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)].*
(10.7) 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)].*
(10.8) 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)].*
(10.9) 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)].*
(99) OTHER:
(99.1) Principal Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(99.2) Chief Accounting Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanex-Oxley Act of 2002.
* Incorporated by reference
+ Filed herein
-11-
<Page>
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 7th day of
January, 2003.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
By: Krupp Plus Corporation,
a General Partner
By: /s/ Douglas Krupp
-----------------
Douglas Krupp, President, Co-Chairman
(Principal Executive Officer) 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 7th day of January, 2003.
SIGNATURES TITLE(s)
/s/ Douglas Krupp President, Co-Chairman
- ----------------------------- (Principal Executive Officer),
Douglas Krupp and Director of Krupp Plus Corporation,
a General Partner
/s/ George Krupp Co-Chairman (Principal Executive Officer)
- ----------------------------- and Director of Krupp Plus Corporation,
George Krupp a General Partner.
/s/ Peter F. Donovan Senior Vice President of Krupp Plus
- ----------------------------- Corporation, a General Partner
Peter F. Donovan
/s/ Robert A. Barrows Treasurer and Chief Accounting Officer
- ------------------------------ of Krupp Plus Corporation, a
Robert A. Barrows General Partner.
-12-
<Page>
CERTIFICATIONS
I, Douglas Krupp, certify that:
1. I have reviewed this annual report on Form 10-K/A of Krupp
Insured Plus - III Limited Partnership;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report.
Date: January 7, 2003
/s/ Douglas Krupp
---------------------------
Douglas Krupp
Principal Executive Officer
-13-
<Page>
CERTIFICATIONS
I, Robert A. Barrows, certify that:
1. I have reviewed this annual report on Form 10-K/A of Krupp
Insured Plus - III Limited Partnership;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report.
Date: January 7, 2003
/s/ Robert A. Barrows
------------------------
Robert A. Barrows
Chief Accounting Officer
-14-
<Page>
APPENDIX A
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
-----------------
FINANCIAL STATEMENTS AND SCHEDULE
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 2001
F-1
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-----------------
<Table>
Report of Independent Accountants F-3
Balance Sheets at December 31, 2001 and 2000 F-4
Statements of Income and Comprehensive Income for the Years
Ended December 31, 2001, 2000 and 1999 F-5
Statements of Changes in Partners' Equity for the Years Ended
December 31, 2001, 2000 and 1999 F-6
Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999 F-7
Notes to Financial Statements F-8 - F-15
</Table>
All 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
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
-----------------
To the Partners of
Krupp Insured Plus-III Limited Partnership:
In our opinion, the financial statements listed in the accompanying index,
present fairly, in all material respects, the financial position of Krupp
Insured Plus-III Limited Partnership (the "Partnership") at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 22, 2002
F-3
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 2001 and 2000
-----------------
<Table>
<Caption>
2001 2000
------------- --------------
ASSETS
Participating Insured Mortgages ("PIMs")
(Notes B, C, H and I) $ 27,762,795 $ 34,608,223
Mortgage-Backed Securities and insured
mortgage ("MBS")(Notes B, D and H) 11,407,452 12,453,025
------------- --------------
Total mortgage investments 39,170,247 47,061,248
Cash and cash equivalents (Notes B, C and H) 1,900,744 1,910,212
Interest receivable and other assets 275,094 328,054
Prepaid acquisition fees and expenses, net of
accumulated amortization of $955,545 and
$2,201,139, respectively (Note B) 36,194 200,938
Prepaid participation servicing fees, net of
accumulated amortization of $293,743 and
$803,998, respectively (Note B) 34,921 84,189
------------- --------------
Total assets $ 41,417,200 $ 49,584,641
============= ==============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 17,877 $ 17,650
------------- --------------
Partners' equity (deficit) (Notes A, C, E and I):
Limited Partners 41,486,071 49,660,074
(12,770,261 Limited Partner interests outstanding)
General Partners (217,863) (205,525)
Accumulated Comprehensive Income (Note B) 131,115 112,442
------------- --------------
Total Partners' equity 41,399,323 49,566,991
------------- --------------
Total liabilities and Partners' equity $ 41,417,200 $ 49,584,641
============= ==============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-4
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2001, 2000 and 1999
-----------------
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Revenues:(Notes B, C and D)
Interest income - PIMs:
Basic interest $ 2,510,661 $ 2,755,352 $ 4,209,758
Participation interest 25,000 - 1,000,885
Interest income - MBS 894,099 964,919 1,071,160
Other interest income 101,289 278,064 488,332
------------ ------------ ------------
Total revenues 3,531,049 3,998,335 6,770,135
------------ ------------ ------------
Expenses:
Asset management fee to an affiliate (Note F) 318,136 354,888 508,943
Expense reimbursements to affiliates (Note F) 96,318 97,729 74,461
Amortization of prepaid fees and expenses (Note B) 214,012 380,069 1,106,566
General and administrative 139,043 171,995 149,589
------------ ------------ ------------
Total expenses 767,509 1,004,681 1,839,559
------------ ------------ ------------
Net income (Notes E and G) 2,763,540 2,993,654 4,930,576
Other comprehensive income:
Net change in unrealized gain on MBS 18,673 111,473 (326,520)
------------ ------------ ------------
Total comprehensive income $ 2,782,213 $ 3,105,127 $ 4,604,056
============ ============ ============
Allocation of net income (Notes E and G):
Limited Partners $ 2,680,634 $ 2,903,844 $ 4,782,659
============ ============ ============
Average net income per Limited Partner
interest (12,770,261 Limited Partner
interests outstanding) $ .21 $ .23 $ .37
============ ============ ============
General Partners $ 82,906 $ 89,810 $ 147,917
============ ============ ============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-5
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
-----------------
<Table>
<Caption>
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 4,782,659 147,917 - 4,930,576
Quarterly distributions (9,705,323) (177,147) - (9,882,470)
Special distributions (21,453,869) - - (21,453,869)
Change in unrealized gain on MBS - - (326,520) (326,520)
------------- ----------- ------------- --------------
Balance at December 31, 1999 68,593,209 (187,219) 969 68,406,959
Net income 2,903,844 89,810 - 2,993,654
Quarterly distributions (6,895,888) (108,116) - (7,004,004)
Special distributions (14,941,091) - - (14,941,091)
Change in unrealized gain on MBS - - 111,473 111,473
------------- ----------- ------------- --------------
Balance at December 31, 2000 49,660,074 (205,525) 112,442 49,566,991
Net income 2,680,634 82,906 - 2,763,540
Quarterly distributions (4,086,451) (95,244) - (4,181,695)
Special distributions (6,768,186) - - (6,768,186)
Change in unrealized gain on MBS - - 18,673 18,673
------------- ----------- ------------- --------------
Balance at December 31, 2001 $ 41,486,071 $ (217,863) $ 131,115 $ 41,399,323
============= =========== ============= ==============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-6
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
-----------------
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Operating activities:
Net income $ 2,763,540 $ 2,993,654 $ 4,930,576
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of prepaid fees and expenses 214,012 380,069 1,106,566
Shared Appreciation Interest and prepayment premium (15,000) - (828,829)
Changes in assets and liabilities:
Decrease (increase) in interest
receivable and other assets 52,960 317,642 (57,677)
Increase (decrease) in liabilities 227 (1,898) (141,891)
------------ ------------ ------------
Net cash provided by operating activities 3,015,739 3,689,467 5,008,745
------------ ------------ ------------
Investing activities:
Principal collections on PIMs including
Shared Appreciation Interest and prepayment premium
of $15,000 in 2001 and $828,829 in 1999, respectively 6,860,428 321,166 36,396,881
Principal collections on MBS 1,064,246 607,297 2,322,861
------------ ------------ ------------
Net cash provided by investing activities 7,924,674 928,463 38,719,742
------------ ------------ ------------
Financing activities:
Special distributions (6,768,186) (14,941,091) (21,453,869)
Quarterly distributions (4,181,695) (7,004,004) (9,882,470)
------------ ------------ ------------
Net cash used for financing activities (10,949,881) (21,945,095) (31,336,339)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (9,468) (17,327,165) 12,392,148
Cash and cash equivalents, beginning of period 1,910,212 19,237,377 6,845,229
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,900,744 $ 1,910,212 $ 19,237,377
============ ============ ============
Non cash activities:
Increase (decrease) in Fair Value of MBS $ 18,673 $ 111,473 $ (326,520)
============ ============ ============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-7
<Page>
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 was organized for the
purpose of investing in multi-family loans and mortgage backed securities.
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 Limited Partner interests
on June 24, 1988 and completed its public offering having sold 12,770,161
Limited Partner interests for $254,686,736 net of purchase volume
discounts of $716,484 as of June 22, 1990. In addition, Krupp Depositary
Corporation owns one hundred Limited Partner interests.
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):
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with accounting principles generally
accepted in the United States of America ("GAAP").
MBS
The Partnership, in accordance with Financial Accounting Standards Board's
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"), classifies its MBS portfolio as
available-for-sale. The Partnership classifies its MBS portfolio as
available-for-sale as the Partnership expects that a portion of the MBS
portfolio will remain after all of the PIMs pay off and that it will be
necessary to then sell the remaining MBS portfolio at that time in
order to close out the Partnership. In addition, other situations such
as liquidity needs could arise which would necessitate the sale of a
portion of the MBS portfolio. 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.
The Partnership also holds a Federal Housing Administration ("FHA")
insured mortgage which is classified as MBS. The Partnership holds this
loan at amortized cost and does not establish loan loss reserves on this
investment as it is fully insured by the FHA.
PIMs
The Partnership accounts for its MBS portion of a PIM investment in
accordance with FAS 115, under the classification of held to maturity
as this investment has a participation feature. As a result, the
Partnership would not sell or otherwise dispose of the MBS.
Accordingly, the Partnership has both the intention and ability to hold
this investment to expected maturity. The Partnership carries this MBS
at amortized cost.
Basic interest on PIMs is recognized based on the stated coupon rate of
the Government National Mortgage Association ("GNMA") or Fannie Mae
MBS. The Partnership recognizes interest related to the participation
features when the amount becomes fixed and the transaction that gives
rise to such amount is finalized, cash is received and all
contingencies are resolved. This could be the sale of underlying real
estate, which results in a cash payment to the Partnership or a cash
payment made to the Partnership from surplus cash relative to the
participation feature.
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.
Continued
F-8
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
B. SIGNIFICANT ACCOUNTING POLICIES, Continued
PREPAID FEES AND EXPENSES
Prepaid fees and expenses 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 estimated life 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 GNMA loan and at closing if a
Fannie Mae loan.
Upon the repayment of a PIM, any unamortized acquisition fees and expenses
and unamortized participation servicing fees related to such loan are
expensed.
INCOME TAXES
The Partnership is not liable for federal or state income taxes as
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 GAAP 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
At December 31, 2001 and 2000, the Partnership had investments in two PIMs
and three PIMs, respectively. The Partnership's PIMs consist of a GNMA or
Fannie Mae MBS representing the securitized first mortgage loan on the
underlying property and a participation interest in the revenue stream and
appreciation of the underlying property above specified base levels.
The borrower conveys this participation feature to the Partnership
generally through a subordinated multifamily mortgage (the "Agreement").
The Partnership receives guaranteed monthly payments of principal and
interest on the GNMA and Fannie Mae MBS and HUD insures the first mortgage
loan underlying the GNMA MBS. The borrower usually can not prepay the
first mortgage loan during the first five years and may prepay the first
mortgage loan thereafter subject to a 9% prepayment premium in years six
through nine, a 1% prepayment premium in year ten and no prepayment
premium thereafter. The Partnership may receive interest related to its
participation interest in the underlying property, however, this amount is
neither insured nor guaranteed.
Continued
F-9
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
C. PIMs, Continued
Generally, the participation features consist of the following: (i)
"Minimum Additional Interest" rates 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 and (iii)
"Shared Appreciation Interest" ranging from 30% to 35% of any increase in
the value of the underlying property in excess of a specified base.
Payment of Minimum Additional Interest and Shared Income Interest from the
operations of the property is limited to 50% of net revenue or Surplus
Cash as defined by Fannie Mae or HUD, respectively.
The total amount of Minimum Additional Interest, Shared Income Interest
and Shared Appreciation Interest payable on the maturity date by the
underlying borrower usually can not exceed 50% of any increase in value of
the property. However, generally any net proceeds from a sale or
refinancing 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 June 2001, the Partnership received a payoff of the Casa Marina PIM
in the amount of $6,727,016. In addition, the Partnership received $15,000
of Shared Appreciation Interest and $10,000 of Minimum Additional Interest
upon the payoff of the underlying mortgage. On July 18, 2001, the
Partnership paid a special distribution of $.53 per Limited Partner
interest from the principal proceeds and Shared Appreciation received from
Casa Marina.
On January 11, 2000, the Partnership paid a special distribution of $1.17
per Limited Partner interest consisting of the principal proceeds and
Shared Appreciation Interest in the amounts of $14,491,746 and $426,321,
respectively from the Marina Shores Apartments PIM payoff in December of
1999.
In August 1999, the Partnership received a prepayment of the Mill Ponds
Apartments PIM in the amount of $9,751,550 representing the outstanding
principal balance. In addition to the prepayment, the Partnership received
$402,508 of Shared Appreciation Interest and $172,464 of Minimum
Additional Interest and Shared Income Interest in July, 1999. The
Partnership distributed the capital transaction proceeds from this
prepayment to the Limited Partners through a special distribution on
September 9, 1999 in the amount of $.80 per Limited Partner interest.
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.
Continued
F-10
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
C. PIMs, continued
At December 31, 2001 and 2000 there were no loans within the Partnership's
portfolio that were delinquent as to principal or interest.
The Partnership's PIMs consist of the following at December 31, 2001 and
2000:
<Table>
<Caption>
Investment Basis at
Original Approximate December 31,
Face Interest Maturity Monthly --------------------------------
PIMs Amount Rate(a) Dates(f) Payment(g) 2001 2000
- ---- ------------- -------- ---------- ------------ ------------- -------------
GNMA
Casa Marina
Apts.
Miami, FL $ 7,099,700 - - $ - $ - $ 6,748,832
Harbor Club
Apts.
Ann Arbor, MI 13,562,000 8.00%(c)(d)(e) 10/15/31 95,000 12,998,733 13,095,330
------------- ------------- -------------
20,661,700 12,998,733 19,844,162
------------- ------------- -------------
FANNIE MAE
Royal Palm Pl.
Apts
Kendall, FL 15,978,742 8.375%(b)(h) 4/1/06 103,000 14,764,062 14,764,061
------------- ------------- -------------
Total $ 36,640,442 $ 27,762,795(i) $ 34,608,223
============= ============= =============
</Table>
(a) Represents the permanent interest rate of the GNMA or Fannie Mae MBS.
The Partnership may also receive additional interest, consisting of
(i) Minimum Additional Interest (ii) Shared Income Interest and (iii)
Shared Appreciation Interest
(b) Minimum Additional Interest is at a rate of .5% per annum calculated
on the unpaid principal balance of the first mortgage note.
(c) Minimum Additional Interest is at a rate of .75% per annum calculated
on the unpaid principal balance of the first mortgage note.
(d) Shared Income Interest is based on 25% of monthly gross rental income
over a specified base amount.
(e) Shared Appreciation Interest is based on 35% of any increase in the
value of the project over the specified base value.
(f) The Partnership's GNMA MBS have call provisions, which allow the
Partnership to accelerate their respective maturity date.
Continued
F-11
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
C PIMs, Continued
(g) The normal monthly payment consisting of principal and interest is
payable monthly at level amounts over the term of the GNMA MBS. The
normal monthly payment consists of interest only for the Fannie Mae
MBS. The GNMA MBS and Fannie Mae MBS may not be prepaid during the
first five years and may generally be prepaid subject to a 9%
prepayment premium in years six through nine, a 1% prepayment premium
in year ten and no prepayment premium after year ten.
(h) During December 1995, the Partnership agreed to a modification of the
Royal Palm PIM. The Partnership received a reissued Fannie Mae MBS and
increased its participation percentage in income and appreciation from
25% to 30%. The Partnership will receive interest only payments on the
Fannie Mae MBS at interest rates ranging from 8.375% to 8.775% per
annum through maturity. The original face value of the PIM on the
underlying property was $22,000,000 of which 27% or $6,021,258 is held
by Krupp Insured Plus Limited Partnership, an affiliate of the
Partnership.
(i) The aggregate cost of PIMs for federal income tax purposes is
$27,762,795.
A reconciliation of the carrying value of PIMs for each of the three
years in the period ended December 31, 2001 is as follows:
<Table>
<Caption>
2001 2000 1999
--------------- ------------- ---------------
Balance at beginning of period $ 34,608,223 $ 34,929,389 $ 70,497,441
Deductions during period:
Principal collections (6,845,428) (321,166) (35,568,052)
--------------- ------------- ---------------
Balance at end of period $ 27,762,795 $ 34,608,223 $ 34,929,389
=============== ============= ===============
</Table>
The underlying mortgages of the PIMs are collateralized by multi-family
apartment complexes located in two states. The apartment complexes range
in size from 208 to 377 units.
D. MBS
At December 31, 2001, the Partnership's MBS portfolio had an amortized
cost of $3,343,185 and unrealized gains of $131,115. At December 31, 2001,
the Partnership's insured mortgage loan had an amortized cost of
$7,933,152 and an unrealized gain of $221,970. At December 31, 2000, the
Partnership's MBS portfolio had an amortized cost of $4,356,235 and
unrealized gains and losses of $113,260 and $818, respectively. At
December 31, 2000, the Partnership's insured mortgage loan had an
amortized cost of $7,984,348 and an unrealized gain of $79,844. The
portfolio has maturity dates ranging from 2016 to 2035.
<Table>
<Caption>
Unrealized
Maturity Date Fair Value Gain
--------------- ------------- -------------
2002 - 2006 $ - $ -
2007 - 2011 - -
2012 - 2035 11,629,422 353,085
------------- ------------
Total $ 11,629,422 $ 353,085
============= =============
</Table>
Continued
F-12
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
E. PARTNERS' EQUITY
Under the terms of the Partnership Agreement, profits from Partnership
operations and Distributable Cash Flow are allocated 97% to the
Unitholders 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 General Partners 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.
Upon the occurrence of a terminating capital transaction, as defined in
the Partnership Agreement, the net cash proceeds and winding up of the
affairs of the Partnership will be allocated among the Partners first, to
each class of Partners in the amount equal to, or if less than, in
proportion to, the positive balance in the Partner's capital accounts,
second, to the Limited Partners until they have received a return of their
total invested capital, third, to the General Partners until they have
received a return of their total invested capital, fourth, 99% to the
Limited Partners and 1% to the General Partners until the Limited Partners
have received 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, fifth, to the General Partners until they have
received an amount equal to 4% of all amounts of cash distributed under
all capital transactions and sixth, 96% to the Limited Partners and 4% to
the General Partners.
During 2001, 2000 and 1999, the Partnership made quarterly distributions
totaling $.32, $.54 and $.76 per Limited Partner interest respectively.
The Partnership made special distributions of $.53, $1.17 and $1.68 per
Limited Partner interest in 2001, 2000, and 1999, respectively.
As of December 31, 2001, the following cumulative partner contributions
and allocations have been made since inception of the Partnership:
<Table>
<Caption>
Corporate Accumulated Total
Limited General Comprehensive Partners'
Unitholders Partner Partners Income Equity
--------------- --------- ------------ ------------- ---------------
Capital contributions $ 254,686,736 $ 2,000 $ 3,000 $ - $ 254,691,736
Syndication costs (15,834,700) - - - (15,834,700)
Quarterly distributions (193,374,105) (1,625) (4,445,830) - (197,821,560)
Special distributions (140,598,377) (1,101) - - (140,599,478)
Net income 136,606,104 1,139 4,224,967 - 140,832,210
Unrealized gains on MBS - - - 131,115 131,115
--------------- --------- ------------ ----------- ---------------
Total at December 31, 2001 $ 41,485,658 $ 413 $ (217,863) $ 131,115 $ 41,399,323
=============== ========= ============ =========== ===============
</Table>
Continued
F-13
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
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 remaining face value of the Partnership's 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, the preparation and mailing of
financial reports, tax information and other communications to the
investors and legal fees and expenses.
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 2001
federal income tax return is as follows:
<Table>
Net income per statement of income $ 2,763,540
Less: Book to tax difference for amortization
of prepaid fees and expenses (375,904)
------------
Net income for federal income tax purposes $ 2,387,636
============
</Table>
The allocation of the net income for federal income tax purposes for 2001
is as follows:
<Table>
<Caption>
Portfolio
Income
------------
Unitholders $ 2,316,739
Corporate Limited Partner 18
General Partners 70,879
------------
$ 2,387,636
============
</Table>
During the years ended December 31, 2001, 2000 and 1999 the average per
unit net income to the Unitholders for federal income tax purposes was
$.18, $.24 and $.34, respectively.
The basis of the Partnership's assets for financial reporting purposes was
less than its tax basis by approximately $815,000 and $1,191,000 at
December 31, 2001 and 2000, respectively. The basis of the Partnership's
liabilities for financial reporting purposes was less than its tax basis
by approximately $18,000 at December 31, 2001. At December 31, 2000 the
basis of the Partnerships liabilities for financial reporting purposes was
the same as its tax basis.
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.
Continued
F-14
<Page>
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
-----------------
H. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS, Continued
MBS
The Partnership estimates the fair value of MBS based on quoted market
prices while it estimates the fair value of insured mortgages based on
quoted prices of MBS with similar interest rates. Based on the estimated
fair value determined using these methods and assumptions, the
Partnership's investments in MBS and insured mortgages had gross
unrealized gains of approximately $353,000 at December 31, 2001 and
unrealized gains and losses of approximately $193,000 and $1,000 at
December 31, 2000.
PIMs
As there is no active trading market for these investments, Management
estimates the fair value of the PIMs using quoted market prices of MBS
having a similar interest rate. Management does not include any
participation interest in the Partnership's estimated fair value arising
from the properties, as 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 of
approximately $613,000 and $161,000 at December 31, 2001 and December 31,
2000, respectively.
At December 31, 2001 and 2000, the Partnership estimates the fair values
of its financial instruments as follows (amounts rounded to nearest
thousand):
<Table>
<Caption>
2001 2000
------------------------ -----------------------
Fair Carrying Fair Carrying
Value Value Value Value
Cash and cash equivalents $ 1,901 $ 1,901 $ 1,910 $ 1,910
MBS and insured mortgage 11,629 11,407 12,533 12,453
PIMs 28,376 27,763 34,769 34,608
--------- -------- ---------- ----------
$ 41,906 $ 41,071 $ 49,212 $ 48,971
========= ======== ========== ==========
</Table>
I. SUBSEQUENT EVENTS
The Partnership received a prepayment of the Royal Palm Place Subordinate
Promissory note. On January 2, 2002, the Partnership received $1,004,379
of Shared Appreciation Interest and $322,401 of Minimum Additional
Interest. On February 25, 2002, the Partnership received $14,764,062
representing the principal proceeds on the first mortgage. The Partnership
has declared a special distribution of $1.24 per Limited Partner interest
consisting of Shared Appreciation Interest and prepayment proceeds which
will be paid in the first quarter of 2002.
F-15