-----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, H/56hJ+Q2E9zdDsAmWdP+crJrKKeDH8ScR1t5wnoCXRbq2aI0WvY+RV3X9vEmRlc u1ehAN0ek1Q83KmJNTpUzw== 0001047469-03-000467.txt : 20030107 0001047469-03-000467.hdr.sgml : 20030107 20030107124649 ACCESSION NUMBER: 0001047469-03-000467 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20030107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP INSURED PLUS III LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000832091 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 043007489 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17691 FILM NUMBER: 03506194 BUSINESS ADDRESS: STREET 1: ONE BEACON ST CITY: BOSTON STATE: MA ZIP: 02108 BUSINESS PHONE: 6175230066 MAIL ADDRESS: STREET 1: ONE BEACON ST CITY: BOSTON STATE: MA ZIP: 02108 10-K/A 1 a2095237z10-ka.txt FORM 10-K/A 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 - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3007489 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Beacon Street, Boston, Massachusetts 02108 - -------------------------------------------------------------------------------- (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. 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 -2- 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. -3- 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:
2000 2001 -------------------------- ------------------------------ Average Average Amount Per Unit Amount Per Unit ------------- --------- ------------- ----------- Quarterly Distributions Limited Partners $ 4,086,451 $ .32 $ 6,895,888 $ .54 General Partners 95,244 - 108,116 - ------------- ------------- 4,181,695 7,004,004 ------------- ------------- Special Distributions Limited Partners 6,768,186 $ .53 14,941,091 $ 1.17 ------------- ------------- Total Distributions $ 10,949,881 $ 21,945,095 ============= =============
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.
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
-4- 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. -5- 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 $1.6 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization. INTEREST RATE RISK The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 2001, the Partnerships PIMs, and MBS comprise the majority of the Partnership's assets. Decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold its PIM investments to expected maturity, while it is expected that substantially all of the MBS will prepay over the same time period, thereby mitigating any potential interest rate risk to the disposition value of any remaining MBS. The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, -6- when setting regular distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they are scheduled to mature. The table below provides information about the Partnership's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates ("WAIR") by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments.
Expected maturity dates ($ in thousands) ------------------------------------------------------------------------------------------- Total Face Fair 2002 2003 2004 2005 2006 Thereafter Value Value(1) ------------------------------------------------------------------------------------------- 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 ======== ======== ======== ======== ========= ========== ========= ==========
(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.
(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 ======= ======== ========
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 -7- 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:
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
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 -8- 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 -9- 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- 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- 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- 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- 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- 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 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULES ----------------- 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
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 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 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP BALANCE SHEETS December 31, 2001 and 2000 -----------------
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 ============= ==============
The accompanying notes are an integral part of the financial statements. F-4 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2001, 2000 and 1999 -----------------
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 ============ ============ ============
The accompanying notes are an integral part of the financial statements. F-5 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999 -----------------
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 ============= =========== ============= ==============
The accompanying notes are an integral part of the financial statements. F-6 KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999 -----------------
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) ============ ============ ============
The accompanying notes are an integral part of the financial statements. F-7 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 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 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 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:
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 ============= ============= =============
(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 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:
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 =============== ============= ===============
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.
Unrealized Maturity Date Fair Value Gain --------------- ------------- ------------- 2002 - 2006 $ - $ - 2007 - 2011 - - 2012 - 2035 11,629,422 353,085 ------------- ------------ Total $ 11,629,422 $ 353,085 ============= =============
Continued F-12 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:
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 =============== ========= ============ =========== ===============
Continued F-13 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: 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 ============
The allocation of the net income for federal income tax purposes for 2001 is as follows:
Portfolio Income ------------ Unitholders $ 2,316,739 Corporate Limited Partner 18 General Partners 70,879 ------------ $ 2,387,636 ============
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 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):
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 ========= ======== ========== ==========
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 EX-99.1 3 a2095237zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Krupp Insured Plus III Limited Partnership (the "Partnership") on Form 10-K/A for the period ending December 31, 2001 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas Krupp, Co-Chariman (Principal Executive Officer), President and Director of Krupp Plus Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of December 31, 2001 (the last date of the period covered by the Report). /s/ Douglas Krupp - --------------------------- Douglas Krupp, Principal Executive Officer EX-99.2 4 a2095237zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Krupp Insured Plus III Limited Partnership (the "Partnership") on Form 10-K/A for the period ending December 31, 2001 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert A. Barrows, Chief Accounting Officer of Krupp Plus Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of December 31, 2001 (the last date of the period covered by the Report). /s/ Robert A. Barrows - ------------------------ Robert A. Barrows, Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----