-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lys7m96bpzggcfIfZhFbIp305cjPopP/cU63lT/0ZWYPMuSg6uBlxR5XB4H98K35 QaCyZ1k+15MfEa3M7pGM+w== 0001178862-03-000015.txt : 20030813 0001178862-03-000015.hdr.sgml : 20030813 20030813172916 ACCESSION NUMBER: 0001178862-03-000015 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030530 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKSHIRE INCOME REALTY INC CENTRAL INDEX KEY: 0001178862 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 320024337 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-31659 FILM NUMBER: 03842612 BUSINESS ADDRESS: STREET 1: ONE BEACON ST STREET 2: SUITE 1500 CITY: BOSTON STATE: MA ZIP: 02108 MAIL ADDRESS: STREET 1: ONE BEACON ST STREET 2: SUITE 1500 CITY: BOSTON STATE: MA ZIP: 02108 8-K/A 1 bir8ka.txt BERKSHIRE INCOME REALTY, INC. 8-K/A MAY 30, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): May 30, 2003 Berkshire Income Realty, Inc. (Exact Name of Registrant as Specified in its Charter) Maryland 001-31659 32-0024337 (State or other jurisdiction (Commission (I.R.S. Employer of incorporation or organization) File Number) Identification No.) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 523-7722 Not applicable (Former Name or Former Address, if Changed Since Last Report) Berkshire Income Realty, Inc. (the "Company") hereby amends it Current Report on Form 8-K dated May 30, 2003, filed with the Securities and Exchange Commission on June 16, 2003 to (i) amend Item 2 in its entirety and (ii) include Item 7 to include required financial statements, pro forma financial information and certain exhibits. ITEM 2. ACQUISITION OF ASSETS On May 30, 2003 Berkshire Income Realty - OP, L.P. (the "Operating Partnership") and its wholly owned subsidiary BIR McNab Sub, L.L.C., a newly formed Delaware limited liability company, acquired all of the outstanding limited partner and general partner units of McNab KC3 Limited Partnership ("McNab"). The acquisition was a contribution of units from an affiliate of the Company's advisory company "the Advisor" in exchange for the issuance by the Operating Partnership of 5,000 common limited partner units valued at $10.00 per unit. The transaction was approved by the Audit Committee of the Company's Board of Directors on May 6, 2003. McNab is the fee simple owner of a 276-unit multi-family apartment community located in Pompano Beach, Florida that is referred to as Windward Lakes Apartments (`Windward"). Prior to the acquisition, the then lender on this property, which was an affiliate of the Company, engaged a third party appraisal firm to determine the value of the property for purposes of determining the total amount payable to the lender under the terms of its participating mortgage. The third party appraisal firm valued the property at $19,000,000. The Company's Audit Committee and the affiliates that owned all of the general and limited partnership units in McNab agreed to accept this appraised value as the value for the contribution by the affiliates of the McNab partnership units to the Operating Partnership. The partnership units were contributed to the Operating Partnership subject to certain debt collateralized by the units totaling approximately $4,162,000 (the "Additional Loan"). Such amount included principal, accrued and unpaid base interest and estimated participation interest due under the terms of the Additional Loan. The property also had a first mortgage lien collateralized by the real estate with a then current balance of approximately $13,398,000, plus approximately $684,000 in accrued interest rebates due to the lender. The lender on both the Additional Loan and the first mortgage for McNab was an affiliate, Krupp Governemnt Income Trust ("GIT"). Simultaneously with the closing of the McNab transaction, the Company paid off approximately $18,244,000 of the debts assumed through the transaction and all of the GIT financing was satisfied in full. As a result of the payoff of the GIT financing described above, the Operating Partnership, which owns approximately 31% of GIT, is expected to receive approximately $5,650,000 as a special distribution from GIT on or about July 24, 2003. Windward Lakes was constructed in 1992 and was 93.1% occupied at the time of acquisition. Financial statements for McNab KC3 Limited Partnership are presented in Item 7. 1 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS At the time of filing of the Form 8-K disclosing the acquisition by the Company of all of the partnership interests as set forth in Item 2 above, the financial statements of the acquired entity were not available. The Company indicated that it would file the necessary financial information within sixty days after the initial filing date. (a) Financial Statements under Rule 3-05 of Regulation S-X: 1. Report of Independent Accountants 2. Balance sheets of McNab KC3 Limited Partnership at March 31, 2003 (unaudited) and at December 31, 2002 and 2001. 3. Statements of Operations of McNab KC3 Limited Partnership for the 3 months ended March 31, 2003 (unaudited), and the years ended December 31, 2002, 2001 and 2000. 4. Statements of Changes in Partners' Deficit for the three months ended March 31, 2003 (unaudited) and the years ended December 31, 2002, 2001 and 2000. 5. Statements of Cash Flows for the three months ended March 31, 2003 (unaudited) and the years ended December 31, 2002, 2001 and 2000. 6. Notes to the Financial Statements of McNab KC3 Limited Partnership (b) Pro Forma Financial Information 1. Unaudited Pro Forma Combined Balance Sheets of the Berkshire Income Realty Predecessor Group at March 31, 2003, December 31, 2002 and 2001. 2. Unaudited Pro Forma Combined Statements of Operations of the Berkshire Income Realty Predecessor Group for the three months ended March 31, 2003, and the years ended December 31, 2002, 2001 and 2000. 3. Notes to the Unaudited Pro Forma Combined Financial Statements of the Berkshire Income Realty Predecessor Group. (c) Exhibits EXHIBIT NO. *10.1Contribution and Sale Agreement, dated May 29, 2003, among George Krupp, Douglas Krupp, Krupp GP, Inc., Berkshire Income Realty-OP, L.P. and McNab Sub, L.L.C. *Previously filed. 2 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. Berkshire Income Realty, Inc. /s/ David C. Quade ----------------------------- Date: August 13, 2003 Name: David C. Quade Title: President and Chief Financial Officer 3 Report of Independent Auditors To the Board of Directors and Stockholders of Berkshire Income Realty, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations, changes in partners' deficit, and cash flows present fairly, in all material respects, the financial position of McNab KC3 Limited Partnership (the "Partnership") at December 31, 2002 and December 31, 2001, and the results of operations, changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 2002 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. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts August 13, 2003 4 MCNAB KC3 LIMITED PARTNERSHIP BALANCE SHEETS (in thousands) December 31, March 31, ---------------------- 2003 2002 2001 ---------- ---------- ---------- (unaudited) ASSETS Multi-family apartment communities, net of accumulated depreciation of $6,852, $6,710 and $6,116, respectively $ 9,090 $ 9,186 $ 9,277 Cash and cash equivalents 36 86 405 Cash restricted for tenant security deposits 74 74 74 Replacement reserve escrow 127 116 216 Prepaid expenses and other assets 438 323 249 Deferred expenses, net of accumulated amortization of $93, $91 and $82, respectively 254 256 265 ---------- ---------- ---------- Total assets $ 10,019 $ 10,041 $ 10,486 ========== ========== ========== LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage note payable - affiliate $ 13,310 $ 13,334 $ 13,427 Notes payable - affiliate 3,155 3,155 3,155 Due to affiliates 2,937 2,879 2,519 Accrued expenses and other liabilities 349 248 224 Tenant security deposits 70 73 59 ---------- ---------- ---------- Total liabilities 19,821 19,689 19,384 Partners' deficit (9,082) (9,648) (8,898) ---------- ---------- ---------- Total liabilities and partners' deficit $ 10,019 $ 10,041 $ 10,486 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 5 MCNAB KC3 LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (in thousands) Three Months Ended March 31, Year Ended December 31, ------------ ---------------------------------- 2003 2002 2001 2000 ------------ ---------- ---------- ---------- (Unaudited) Revenue: Rental $ 646 $ 2,649 $ 2,690 $ 2,630 Interest - 5 31 13 Utility reimbursements 5 29 6 - Other 39 194 185 130 ------------ ---------- ---------- ---------- Total revenue 690 2,877 2,912 2,773 Expenses: Operating 141 602 572 497 Maintenance 49 203 298 163 Real estate taxes 112 443 388 382 General and administrative 18 65 49 52 Management fees 20 86 93 73 Depreciation 142 594 628 542 Interest 362 1,459 1,474 1,482 Participation interest - 175 545 - ------------ ---------- ---------- ---------- Total expenses 844 3,627 4,047 3,191 ------------ ---------- ---------- ---------- Net loss $ (154) $ (750) $ (1,135) $ (418) ============ ========== ========== ========== Allocation of net loss: Limited Partners $ (152) $ (743) $ (1,123) $ (414) ============ ========== ========== ========== General Partners $ (2) $ (7) $ (12) $ (4) ============ ========== ========== ========== The accompanying notes are an integral part of these financial statements 6 MCNAB KC3 LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands) Limited General Partners Partners Total ---------- ---------- ---------- Balance at December 31, 1999 $ (7,272) $ (73) $ (7,345) Net loss (414) (4) (418) ---------- ---------- ---------- Balance at December 31, 2000 (7,686) (77) (7,763) Net loss (1,123) (12) (1,135) ---------- ---------- ---------- Balance at December 31, 2001 (8,809) (89) (8,898) Net loss (743) (7) (750) ---------- ---------- ---------- Balance at December 31, 2002 (9,552) (96) (9,648) Net loss (unaudited) (152) (2) (154) ---------- ---------- ---------- Balance at March 31, 2003 (unaudited) $ (9,704) $ (98) $ (9,802) ========== ========== ========== The accompanying notes are an integral part of these financial statements 7 MCNAB KC3 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (in thousands) Three Months Year Ended December 31, Ended March ---------------------------------- 31, 2003 2002 2001 2000 ------------ ---------- ---------- ---------- (unaudited) Cash flows from operating activities: Net loss $ (154) $ (750) $ (1,135) $ (418) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of deferred financing costs 2 9 9 9 Depreciation 142 594 628 542 Increase (decrease) in cash attributable to changes in assets and liabilities: Tenant security deposits, net (3) 14 (22) 8 Prepaid expenses and other assets (115) (74) 8 (16) Due to affiliates 58 360 730 190 Accrued expenses and other liabilities 101 24 139 38 ------------ ---------- ---------- ---------- Net cash provided by (used in) operating activities 31 177 357 353 ------------ ---------- ---------- ---------- Cash flows from investing activities: Capital improvements (46) (503) (115) (140) Replacement reserve escrow (11) 100 (45) (7) ------------ ---------- ---------- ---------- Net cash used in investing activities (57) (403) (160) (147) ------------ ---------- ---------- ---------- Cash flows from financing activities: Principal payments on mortgage note payable (24) (93) (85) (78) Notes payable - - - 147 ------------ --------- ---------- ---------- Net cash provided by (used in) financing activities (24) (93) (85) 69 ------------ ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (50) (319) 112 275 Cash and cash equivalents at beginning of period 86 405 293 18 ------------ ---------- ---------- ---------- Cash and cash equivalents at end of period $ 36 $ 86 $ 405 $ 293 ============ ========== ========== ========== Supplemental disclosures: Cash paid for interest $ 292 $ 1,171 $ 1,179 $ 1,186 ============ ========== ========== ========== Supplemental disclosure of non-cash investing activities: Capital improvements in accrued expenses and other liabilities $ 139 $ 56 $ 90 $ 113 ============ ========== ========== ========== The accompanying notes are an integral part of these financial statements 8 MCNAB KC3 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (In Thousands) 1. Organization and Basis of Presentation McNab KC3 Limited Partnership (the "Partnership") was formed on February 20, 1990, by filing a Certificate of Limited Partnership in the Commonwealth of Massachusetts. The Partnership will terminate on February 20, 2070, unless earlier terminated upon the sale of the last of the Partnership's property or the occurrence of certain other events as set forth in the Limited Partnership Agreement. The Partnership issued its general partner interest to Krupp GP, Inc. and all of its limited partner interests to George and Douglas Krupp. The Partnership was formed primarily to acquire land and develop the 276-unit Windward Lakes multi-family apartment complex ("Windward") on such 13.76 acres of land and, upon completion of Windward, to operate, maintain and eventually sell the property. Construction of Windward was completed in 1992. During 1990, George and Douglas Krupp, the limited partners and Krupp GP, Inc, the general partner obtained a $2,471 additional note (the "Additional Note") and utilized the proceeds to make a capital contribution to the Partnership. The Note was collateralized by a first lien security interest in George and Douglas Krupp's limited partnership interests in the Partnership and to all distributions of surplus cash, unrestricted cash and proceeds from a liquidation, sale or refinancing of Windward Lakes or the partnership interests to which the Borrowers are or become entitled. As a result of the nature of the provisions of the Additional Note and pursuant to the provisions of SAB Topic 5-J, such debt has been reflected or "pushed down" in the financial statements of the Partnership. On May 29, 2003, Krupp GP, Inc. liquidated its assets by distributing its general partner interest in the Partnership to the limited partners, George and Douglas Krupp. On May 30, 2003, George and Douglas Krupp transferred the general partner interest in the Partnership to BIR-OP McNab Sub, L.L.C., a newly formed Delaware limited liability company, whose sole member is Berkshire Income Realty - OP, L.P. ("BIR-OP"), and transferred their limited partner interests to BIR-OP in exchange for units of BIR-OP. 2. Significant Accounting Policies Real Estate Real estate assets are recorded at depreciated cost. Costs related to the acquisition, development, rehabilitation and improvement of properties are capitalized. Recurring capital improvements typically include: appliances, carpeting and flooring, HVAC equipment, kitchen/bath cabinets, site improvements and various exterior building improvements. Non-recurring upgrades include kitchen/bath upgrades, new roofs, window replacements and the development of on-site fitness, business and community centers. Expenditures for ordinary maintenance and repairs are charged to operations as incurred. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets, as follows: Rental property 27.5 years Improvements 5 to 25 years Appliances, carpeting, and equipment 3 to 8 years When property is sold, their costs and related depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period. Continued 9 MCNAB KC3 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (in thousands) 2. Significant Accounting Policies (Continued) Pursuant to Statement of Financial Accounting Standards Opinion No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the assets carrying value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The Partnership records impairment losses and reduces the carrying amounts of assets held for sale when the carrying amounts exceed the estimated selling proceeds less the costs to sell. No such impairment losses have been recognized to date. Cash and cash equivalents The Partnership invests its cash primarily in deposits and money market funds with commercial banks. All short-term investments with maturities of three months or less from the date of acquisition are included in cash and cash equivalents. The cash investments are recorded at cost, which approximates current market values. The Partnership has not experienced any losses to date on its invested cash. Cash Restricted for Tenant Security Deposits Restricted cash represents security deposits held by the Partnership under the terms of certain tenant lease agreements. Replacement Reserve Escrow Certain lenders require escrow accounts for capital improvements. The escrows are funded from operating cash, as needed. Deferred Expenses Fees and costs incurred to obtain long-term financing have been deferred and are being amortized over the terms of the related loans, on a method, which approximates the effective interest method. Partners' Profits and Losses Partners' profits and losses are allocated in accordance with the terms of the partnership agreement. Rental Revenue The Property is leased under terms of leases with terms of generally one year or less. Rental revenue is recognized when earned. Recoveries from tenants for utility expenses are recorded in the period the applicable costs are incurred. Other income, which consists primarily of income from damages, laundry, cable, phone, pool, fees for month to month tenants, relet fees and pet fees, is recognized when earned. Income Taxes No provision for income taxes is necessary in the financial statements since the statements are not directly subject to income tax. The tax effect of its activities accrues to the individual partners of the entity. Continued 10 MCNAB KC3 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (in thousands) 2. Significant Accounting Policies (Continued) Interim Unaudited Financial Statements The accompanying interim balance sheet at March 31, 2003 and the related statements of operations, statements of changes in partners' deficit and cash flows for the three months ended March 31, 2003 are unaudited and in the opinion of management, include all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of results for the interim period. The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the results to be expected for other interim periods or the full fiscal year. Recent Accounting Pronouncements In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002, which rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, among others. As a result of the rescission of SFAS No. 4, gains or losses from extinguishment of debt are not necessarily considered extraordinary. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The impact of adopting this statement will require the Partnership to classify any losses from extinguishment of debt into continuing operations in the accompanying statements of operations. Adoption of FAS 145 had no impact to the Partnership's financial condition, results of operations or cash flows for the periods presented. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and that an entity's commitment to an exit plan, by itself, does not create a present obligation to others that meets the definition of a liability. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The impact of adopting this statement is not expected to be material to the Partnership's financial condition, results of operations or cash flows. On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to a guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure requirements of FIN 45 are effective for the Partnership as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The Partnership has reviewed the provisions of FIN 45 and believes that the impact of the adoption will not be material to its financial position, results of operations or cash flows. Continued 11 MCNAB KC3 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (in thousands) 2. Significant Accounting Policies (Continued) In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operation of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective upon issuance. The impact of adopting this statement is not expected to be material to the Partnership's financial condition, results of operations or cash flows In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after Partnership's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". FAS 150 was issued as "Phase I" of the FASB's ongoing initiative to establish standards for classification of financial instruments that have characteristics of liabilities, equity, or both, and thus ultimately eliminating the "mezzanine" section of the balance sheet for certain financial instruments. FAS 150 will be effective for the Partnership commencing in the third quarter of 2003. The provisions of FAS 150 are not expected to have a material impact on the Partnership's financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities at the date of financial statements and revenue and expenses during the reporting period. Such estimates include the allowance for depreciation and the fair value of the accrued participating note interest. Actual results could differ from those estimates. 3. Multifamily Apartment Communities The following summarizes the carrying value of the multifamily apartment community (in thousands): December 31, March 31, ---------------------- 2003 2002 2001 ---------- ---------- ---------- (unaudited) Land $ 3,519 $ 3,519 $ 3,519 Buildings, improvements and personal property 12,423 12,377 11,874 ---------- ---------- ---------- Multi-family apartment communities 15,942 15,896 15,393 Accumulated depreciation (6,852) (6,710) (6,116) ---------- ---------- ---------- Multi-family apartment communities, net $ 9,090 $ 9,186 $ 9,277 ========== ========== ========== The aggregate cost of the predecesor's multi-family apartment community for federal income tax purposes was approximately $12,564 and the aggregate accumulated depreciation was approximately $6,144 as of December 31, 2002. Continued 12 MCNAB KC3 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (in thousands) 4. Mortgage Note Payable - Affiliate and Notes Payable - Affiliate The Partnership has financing from Krupp Government Income Trust ("GIT"), an affiliate of the Partnership, in the form of a securitized insured first mortgage (the "First Mortgage"). The First Mortgage requires equal monthly payments of $105, consisting of principal and interest at the rate of 8.5% per annum, based on a 40-year amortization. The outstanding balance of the First Mortgage plus any accrued interest is due and payable on June 1, 2032. As of March 31, 2003 and December 31, 2002 and 2001, the outstanding balance of the First Mortgage was equal to $13,310, $13,334 and $13,427, respectively. Combined aggregate principal maturities of the mortgage note payable during the five years ended March 31, 2003 and thereafter are approximately as follows: 2003 $ 101 2004 110 2005 120 2006 131 2007 142 Thereafter 12,706 ---------- $ 13,310 ========== The Partnership has a subordinated promissory note with GIT which provides GIT with certain participation interests ("Participation Interests") in 50% of the revenue stream and appreciation of Windward, payable from residual value, if any, from a sale or refinancing of Windward. The Partnership has accounted for the Participation Interests in accordance with the provisions of the AICPA's Statement of Position 97-1, Accounting by Participating Mortgage Loan Borrowers. The Partnership has estimated the fair value of the participating interest, utilizing a discounted cash flow model, to be approximately $719 at December 31, 2002 and was recorded as accrued participating interest in the accompanying balance sheet at December 31, 2002. As described in Note 1, an Additional Note of $2,471, collateralized by a first lien security interest in George and Douglas Krupp's limited partnership interests in the Partnership, was issued by GIT and has been reflected in the financial statements of the Partnership. The Additional Note requires semiannual installments of interest equal to $93 based on a fixed interest rate of 7.5%. The Additional Note and any accrued interest is due and payable upon the first to occur of (i) the sale or refinancing of Windward; (ii) the maturity date of the First Mortgage; or (iii) a prepayment of the First Mortgage. In 1997, GIT issued the Partnership an interest rebate (the "Interest Rebate") in which GIT refunded the Partnership the difference between the original interest rate on the First Mortgage of 8.75% and the modified rate of 8.5%. The Interest Rebate equal to $684 is treated as a loan and is due upon maturity of the First Mortgage or Additional Note, whichever is earlier. Continued 13 MCNAB KC3 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (in thousands) 5. Related Party Transactions The Partnership pays property management fees to an affiliate for property management services equal to 3% of gross income. The Partnership also reimburses affiliates for certain expenses incurred in connection with the operation of the property, including administrative expenses and salary reimbursements. Amounts accrued or paid to affiliates at March 31, 2003 and December 31, 2002 and 2001 were as follows: December 31, March 31, ---------------------------------- 2003 2002 2001 2000 ------------ ---------- ---------- ---------- Property management fees $ 20 $ 86 $ 93 $ 73 Expense reimbursements - 2 - - Salary reimbursements 60 267 262 215 ------------ ---------- ---------- ---------- Charged to operations $ 80 $ 355 $ 355 $ 288 ============ ========== ========== ========== Expense reimbursements due to affiliates of $12, $7 and $12 are included in accrued expenses and other liabilities at March 31, 2003 and December 31, 2002 and 2001, respectively. Note payable-affiliate includes the Additional Note and Interest Rebate (discussed in Note 4) payable to GIT and is equal to $3,155 at March 31, 2003 and December 31, 2002 and 2001. Due to affiliates include development fees, accrued interest on the First Mortgage and Additional Note (discussed in Note 4), and shared service fees, equal to $2,937, $2,879 and $2,519 at March 31, 2003 and December 31, 2002 and 2001, respectively. 14 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED FINANCIAL STATEMENTS INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS On May 6, 2003, the audit committee of Berkshire Income Realty, Inc. (the "Company") board of directors approved the acquisition by the Operating Partnership of the interests in McNab KC3 Limited Partnership ("McNab") from affiliates of the Company. McNab is the fee simple owner of a 276-unit multi-family apartment community located in Pompano Beach, Florida that is referred to as Windward Lakes Apartments ("Windward"). The general and limited partners of McNab are affiliates of the Company, namely George and Douglas Krupp as the limited partners owning 99% and Krupp GP, Inc. is the general partner owning 1%. Krupp GP, Inc is wholly owned by George and Douglas Krupp. Control of both the Company and McNab rests with George and Douglas Krupp via their 100% ownership interest in the common stock of the Company and their 100% ownership interest in the general and limited partnership units of McNab. Therefore, the acquisition or contribution of the general limited partnership units of McNab by the Operating Partnership in exchange for the issuance by the Operating Partnership of common limited partner units is considered a transfer of net assets between entities under common control. The acquisiton was structured as a contribution of units from an affiliate of the Company in exchange for the issuance by the Operating Partnership of 5,000 common limited partner units valued at $10.00 per unit. Due to the affiliation of the ownership of the Company and McNab (Windward), the acquisition of the interests in McNab has been accounted for as a reorganization of entities under common control, requiring the Company to retroactively restate the combined financial statements of the Berkshire Income REalty Predecessor Group for the periods presented, which is similar to the accounting for a pooling of interests. The following unaudited pro forma financial statements give effect to the acquisition by the Berkshire Income Realty Predecessor Group of McNab. The Operating Partnership is the successor to the Berkshire Income Realty Predecessor Group. The unaudited pro forma balance sheets as of March 31, 2003 and December 31, 2002 and 2001 present the financial position of the Berkshire Income Realty Predecessor Group as if the acquisition of McNab, which occurred subsequent to March 31, 2003, had occurred on March 31, 2003 and December 31, 2002 and 2001, respectively. The unaudited pro forma statements of operations for the three months ended March 31, 2003 and the years ended December 31, 2002, 2001 and 2000, presents the results of operations of McNab as if the acquisition of McNab had been completed as of January 1, 2000. These unaudited pro forma financial statements do not represent the Berkshire Income Realty Predecessor Group financial condition or results of operations for any future date or period. Actual future results could be materially different from these pro forma results. These unaudited pro forma financial statements should be read in conjunction with the audited financial statements of the Berkshire Income Realty Predecessor Group and the related management's discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2002, as well as the unaudited financial statements and the related management's discussion and analysis of financial condition and results of operations included in the Quarterly Reports on Form 10-Q for the quarter ended March 31, 2003. In addition, in conjunction with these unaudited pro forma financial statements, you should read the financial statements of McNab KC3 Limited Partnership, contained elsewhere in this Form 8-K/A. 15 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED BALANCE SHEET March 31, 2003 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(a)) Proforma ---------- ---------- ---------- ASSETS Multi-family apartment communities, net $ 84,169 $ 9,090 $ 93,259 Cash and cash equivalents 6,478 36 6,514 Cash restricted for tenant security deposits 777 74 851 Replacement reserve escrow 387 127 514 Prepaid expenses and other assets 2,408 438 2,846 Deferred expenses, net 984 254 1,238 ---------- ---------- ---------- Total assets $ 95,203 $ 10,019 $ 105,222 ========== ========== ========== LIABILITIES AND OWNERS' DEFICIT Liabilities: Mortgage notes payable $ 105,475 $ 13,310 $ 118,785 Notes payable - 3,155 3,155 Due to affiliates - 2,937 2,937 Accrued expenses and other liabilities 1,206 349 1,555 Tenant security deposits 871 70 941 ---------- ---------- ---------- Total liabilities 107,552 19,821 127,373 Minority interest - - - Owners' deficit (12,349) (9,802) (22,151) ---------- ---------- ---------- Total liabilities and owners' deficit $ 95,203 10,019 105,222 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 16 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED BALANCE SHEET As of December 31, 2002 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(a)) Proforma ---------- ---------- ---------- ASSETS Multi-family apartment communities, net $ 85,157 $ 9,186 $ 94,343 Cash and cash equivalents 4,766 86 4,852 Cash restricted for tenant security deposits 776 74 850 Replacement reserve escrow 291 116 407 Prepaid expenses and other assets 3,410 323 3,733 Deferred expenses, net 1,032 256 1,288 ---------- ---------- ---------- Total assets $ 95,432 $ 10,041 $ 105,473 ========== ========== ========== LIABILITIES AND OWNERS' DEFICIT Liabilities: Mortgage notes payable $ 105,828 13,334 $ 119,162 Notes payable - 3,155 3,155 Due to affiliates - 2,879 2,879 Accrued expenses and other liabilities 1,643 248 1,891 Tenant security deposits 839 73 912 ---------- ---------- ---------- Total liabilities 108,310 19,689 127,999 Minority interest - - - Owners' deficit (12,878) (9,648) (22,526) ---------- ---------- ---------- Total liabilities and owners' deficit $ 95,432 $ 10,041 $ 105,473 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 17 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED BALANCE SHEET As of December 31, 2001 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(a)) Proforma ---------- ---------- ---------- ASSETS Multi-family apartment communities, net $ 87,648 $ 9,277 $ 96,925 Cash and cash equivalents 3,990 405 4,395 Cash restricted for tenant security deposits 811 74 885 Replacement reserve escrow 5 216 221 Prepaid expenses and other assets 1,834 249 2,083 Due from affiliate 1,738 - 1,738 Deferred expenses, net 587 265 852 ---------- ---------- ---------- Total assets $ 96,613 $ 10,486 $ 107,099 ========== ========== ========== LIABILITIES AND OWNERS' EQUITY (DEFICIT) Liabilities: Mortgage notes payable $ 76,799 $ 13,427 $ 90,226 Notes payable - 3,155 3,155 Due to affiliates - 2,519 2,519 Accrued expenses and other liabilities 1,041 224 1,265 Tenant security deposits 802 59 861 ---------- ---------- ---------- Total liabilities 78,642 19,384 98,026 Minority interest 619 - 619 Owners' equity (deficit) 17,352 (8,898) 8,454 ---------- ---------- ---------- Total liabilities and owners' equity (deficit) $ 96,613 $ 10,486 $ 107,099 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 18 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED STATEMENT OF OPERATIONS Three Months Ended March 31, 2003 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(b)) Proforma ---------- ---------- ---------- Revenue: Rental $ 5,962 $ 646 $ 6,608 Interest 32 - 32 Utility reimbursements 104 5 109 Other 205 39 244 ---------- ---------- ---------- Total revenue 6,303 690 6,993 Expenses: Operating 1,474 141 1,615 Maintenance 429 49 478 Real estate taxes 452 112 564 General and administrative 130 18 148 Management fees 412 20 432 Depreciation 1,311 142 1,453 Interest 1,566 362 1,928 ---------- ---------- ---------- Total expenses 5,774 844 6,618 Minority interest - - - ---------- ---------- ---------- Net income (loss) $ 529 $ (154) $ 375 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 19 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 2002 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(b)) Proforma ---------- ---------- ---------- Revenue: Rental $ 23,699 $ 2,649 $ 26,348 Interest 370 5 375 Utility reimbursements 511 29 540 Other 903 194 1,097 ---------- ---------- ---------- Total revenue 25,483 2,877 28,360 Expenses: Operating 5,717 602 6,319 Maintenance 1,883 203 2,086 Real estate taxes 1,771 443 2,214 General and administrative 661 65 726 Management fees 1,703 86 1,789 Depreciation 5,284 594 5,878 Interest 4,988 1,459 6,447 Participating note interest - 175 175 ---------- ---------- ---------- Total expenses 22,007 3,627 25,634 Income (loss) before minority interest 3,476 (750) 2,726 Minority interest (1,520) - (1,520) ---------- ---------- ----------- Net loss (income) $ 1,956 $ (750) $ 1,206 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 20 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 2001 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(b)) Proforma ---------- ---------- ---------- Revenue: Rental $ 23,056 $ 2,690 $ 25,746 Interest 533 31 564 Utility reimbursements 176 6 182 Other 1,111 185 1,296 ---------- ---------- ---------- Total revenue 24,876 2,912 27,788 Expenses: Operating 5,463 572 6,035 Maintenance 1,944 298 2,242 Real estate taxes 1,679 388 2,067 General and administrative 657 49 706 Management fees 1,288 93 1,381 Depreciation 4,751 628 5,379 Interest 5,682 1,474 7,156 Participating note interest 6,591 545 7,136 ---------- ---------- ---------- Total expenses 28,055 4,047 32,102 Loss before minority interest (3,179) (1,135) (4,314) Minority interest 228 - 228 ---------- ---------- ---------- Net loss $ (2,951) $ (1,135) $ (4,086) ========== ========== ========== The accompanying notes are an integral part of these financial statements. 21 BERKSHIRE INCOME REALTY PREDECESSOR GROUP PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 2000 (unaudited, in thousands) Berkshire Income Realty McNab Predecessor Acquisition Group (Note 2(b)) Proforma ---------- ---------- ---------- Revenue: Rental $ 21,869 $ 2,630 $ 24,499 Interest 601 13 614 Other 782 130 912 ---------- ---------- ---------- Total revenue 23,252 2,773 26,025 Expenses: Operating 5,469 497 5,966 Maintenance 1,797 163 1,960 Real estate taxes 1,674 382 2,056 General and administrative 714 52 766 Management fees 1,275 73 1,348 Depreciation 5,011 542 5,553 Interest 7,204 1,482 8,686 Participating note interest 1,013 - 1,013 ---------- ---------- ---------- Total expenses 24,157 3,191 27,348 Loss before minority interest (905) (418) (1,323) Minority interest 517 - 517 ---------- ---------- ---------- Net loss $ (388) $ (418) $ (806) ========== ========== ========== The accompanying notes are an integral Part of these financial statements. 22 BERKSHIRE INCOME REALTY PREDECESSOR GROUP NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS The following pro forma adjustments summarize the adjustments made to the March 31, 2003 and December 31, 2002 and 2001 Berkshire Income Realty Predecessor Group Balance Sheets: (a) The assets and liabilities for McNab have been reflected as if the acquisition of McNab had occurred on March 31, 2003 and December 31, 2002 and 2001, respectively. The following pro forma adjustments summarize the adjustments made to the Statements of Operations of the Berkshire Income Realty Predecessor Group for the three months ended March 31, 2003 and the years ended December 31, 2002, 2001 and 2000: (b) The operations of McNab have been reflected as if the acquisition of McNab had been completed as of January 1, 2000. 23 -----END PRIVACY-ENHANCED MESSAGE-----