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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
UNDER SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934
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KRUPP REALTY FUND, LTD. - III
(Name of the Issuer)
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KRUPP REALTY FUND, LTD. - III
KRF3 ACQUISITION COMPANY, L.L.C.
KRF COMPANY, L.L.C.
THE KRUPP FAMILY LIMITED PARTNERSHIP - 94
THE KRUPP CORPORATION
THE KRUPP COMPANY LIMITED PARTNERSHIP - II
DOUGLAS KRUPP
GEORGE KRUPP
(Name of Persons Filing Statement)
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LIMITED PARTNERSHIP UNITS
(Title of Class of Securities)
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501128 10 2
(CUSIP Number of Class of Securities)
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SCOTT D. SPELFOGEL, ESQ.
THE BERKSHIRE GROUP
ONE BEACON STREET
BOSTON, MASSACHUSETTS 02108
(617) 574-8385
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Persons Filing Statement)
---------------------------
WITH COPIES TO:
JAMES M. DUBIN, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
(212) 373-3000
This statement is filed in connection with (check appropriate box):
a. |X| The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. |_| The filing of a registration statement under the Securities Act of
1933.
c. |_| A tender offer.
d. |_| None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |X|
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This Rule 13E-3 Transaction Statement (the "Statement") is being
filed by Krupp Realty Fund, Ltd. - III, a Massachusetts limited partnership
(the "Partnership"), KRF3 Acquisition Company, L.L.C., a Delaware limited
liability company ("KRF3" or the "Purchaser"), KRF Company, L.L.C., a
Delaware limited liability company and KRF3's sole member (the "Parent"),
The Krupp Family Limited Partnership - 94, a Massachusetts limited
partnership and the Parent's sole member (the "Family Partnership"), The
Krupp Corporation, a Massachusetts corporation ("Krupp Corp"), The Krupp
Company Limited Partnership - II, a Massachusetts limited partnership
(together with Krupp Corp, the "General Partners"), Douglas Krupp and George
Krupp with respect to the investor limited partnership interests ("Units") of
the Partnership that is subject to a Rule 13e-3 transaction. The General
Partners are submitting to Unit holders a proposal to approve (a) a merger
agreement under which (1) KRF3 will merge with and into the Partnership and
(2) each Unit holder other than certain Unit holders who have agreed to
reinvest their Units in KRF3 will receive $600 in cash for each outstanding
Unit that the Unit holder owns immediately before the effective time of the
merger and (b) an amendment to the Partnership's partnership agreement
allowing the Partnership to enter into the merger agreement and complete the
merger with KRF3 (items (a) and (b) will be considered one proposal and
referred to herein as the "Merger Proposal"). The Merger Proposal is upon the
terms and subject to the conditions set forth in the Partnership's
Preliminary Proxy Statement filed by the general partners of the Partnership
with the Securities and Exchange Commission on March -, 2000 (including all
annexes and exhibits thereto, the "Proxy Statement") for the Partnership's
special meeting scheduled to be held on , 2000.
The information in the Proxy Statement, a copy of which is attached
hereto as Exhibit A, is hereby expressly incorporated by reference in its
entirety and the responses to each item are qualified in their entirety by the
provisions of the Proxy Statement. The Proxy Statement will be completed and, if
appropriate, amended prior to the time it is first sent or given to unitholders
of the Partnership. This Statement will be amended to reflect such completion or
amendment of the Proxy Statement.
2
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1. SUMMARY TERM SHEET.
The information set forth under the caption "Summary Term Sheet" in the
Proxy Statement is incorporated herein by reference.
ITEM 2. SUBJECT COMPANY INFORMATION.
(a) The name of the issuer of the Units subject to the Rule 13e-3
transaction is Krupp Realty Fund, Ltd. - III, a limited partnership organized
under the laws of Massachusetts, and the principal executive offices of the
Partnership are located at One Beacon Street, Suite 1500, Boston, Massachusetts
02108.
(b) According to the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1999, as of such date, there were 25,000 Units of the
Partnership outstanding held by approximately 588 holders.
(c) The Units are not listed or traded on any exchange or quoted on the
National Association of Securities Dealers Automated Quotation System. However,
information regarding certain private transactions is set forth in under the
caption "Special Factors--Determination of Merger Price--Recent Unit Sales;
Tender Offer" in the Proxy Statement and is incorporated herein by reference.
(d) The information set forth under the caption "Information About the
Partnership, Its General Partners and Their Affiliates--Distributions" of the
Proxy Statement is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in under the caption "Information About the
Partnership, Its General Partners and Their Affiliates--Market for the Units" of
the Proxy Statement is incorporated herein by reference.
ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON.
(a) - (b) The information set forth under the captions "Information
About the Partnership, Its General Partners and Their Affiliates -- The
General Partners" and "Information Concerning the Purchaser and its
Affiliates" of the Proxy Statement is incorporated herein by reference.
(c)(1) The information set forth under the caption "Information Concerning
the Partnership, Its General Partners and Their Affiliates--The General
Partners" of the Proxy Statement is incorporated herein by reference.
(c)(2) The information set forth under the caption "Information Concerning
the Partnership, Its General Partners and Their Affiliates--The General
Partners" of the Proxy Statement is incorporated herein by reference.
(c)(3) During the last five years, neither Douglas Krupp nor George
Krupp has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors).
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(c)(4) During the last five years, neither Douglas Krupp nor George
Krupp was a party to any judicial or administrative proceeding (except for
matters that were dismissed without sanction or settlement) that resulted in
a judgment, decree or final order enjoining the person from future violations
of, or prohibiting activities subject to, federal or state securities laws,
or a finding of any violation of federal or state securities laws.
(c)(5) Messrs. Douglas and George Krupp are both United States citizens.
ITEM 4. TERMS OF THE TRANSACTION.
(a)(1) Not applicable.
(a)(2) The information set forth under the captions and "Special
Factors--Effects of the Transaction" and "The Merger Agreement" of the Proxy
Statement is incorporated herein by reference.
(b) Excluded.
(c) The information set forth under the caption "Related Agreements" is
incorporated herein by reference.
(d) None.
(e) None.
(f) Not applicable.
ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
(a)(1)-(a)(2) The information set forth under the caption "Information
About the Partnership, Its General Partners and Their Affiliates--Related Party
Transactions" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth under the captions "Special
Factors--Background of the Mergers; Purpose of the Transaction" and "The Merger
Agreement" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the captions "Special
Factors--Background of the Merger; Purpose of the Transaction" and "Related
Agreements" is incorporated herein by reference.
(d) Excluded.
(e) The information set forth under the captions "Special
Factors--Background of the Merger; Purpose of the Transaction" and "Related
Agreements" is incorporated herein by reference.
ITEM 6. PURPOSES OF THE TRANSACTIONS AND PLANS OR PROPOSALS.
(a) Excluded.
(b) The information set forth under the captions "Special Factors--Effects
of the Transaction," and "The Merger Agreement--The Effects of the Merger" in
the Proxy Statement is incorporated herein by reference.
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(c)(1) - (c)(8) The information set forth under the captions "Summary Term
Sheet," "Special Factors--Effects of the Transaction," "--Financing of the
Merger--Source of Funds," "--Plans or Proposals by Partnership or Affiliates
Following the Merger," "The Merger Agreement--The Surviving Entity" and
"Information About the Partnership, Its General Partners and Their
Affiliates--Distributions" in the Proxy Statement is incorporated herein by
reference.
ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS.
(a) - (c) The information set forth under the captions "Summary Term
Sheet," "Special Factors-- Background of the Merger; Purpose of the
Transaction," "--Alternatives to the Merger," "--Fairness of the Merger,"
"--Disadvantage and Risks Associated with the Merger" and "--Conflicts of
Interest" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth under the captions "Special Factors
- --Background of the Merger; Purpose of the Transaction," "--Book Value,"
"--Effects of the Transaction," "--Plans or Proposals by Partnership or
Affiliates Following the Merger" and "--Material Federal Income Tax
Consequences" of the Proxy Statement is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) and (b) The information set forth under the caption "Special
Factors--Fairness of the Merger" and "--Liquidation Analysis; Determination of
Merger Price" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the caption "The Special Meeting--Votes
Required" of the Proxy Statement is incorporated herein by reference.
(d) No unaffiliated representative has been retained to act solely on
behalf of unaffiliated holders of Units for the purpose of negotiating the terms
of the Merger Proposal and/or preparing a report concerning the fairness of the
Merger Proposal.
(e) The general partners of the Partnership approved the Merger Proposal.
The information set forth under the captions "Special Factors--Conflicts of
Interest" and "Information About the Partnership, Its General Partners and Their
Affiliates--Related Party Transactions" of the Proxy Statement is incorporated
herein by reference.
(f) The information set forth under the captions "Special
Factors--Recent Unit Sales; Tender Offer" of the Proxy Statement is
incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND NEGOTIATIONS.
(a) The Purchaser has not received any report, opinion or Appraisal from an
outside party that is materially related to the Merger Proposal.
(b) and (c) Not applicable.
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ITEM 10. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth under the caption "Special Factors--Financing
of the Merger--Source of Funds" of the Proxy Statement is incorporated herein by
reference.
(b) None.
(c) The information set forth under the caption "Special Factors--Financing
of the Merger--Source of Funds" of the Proxy Statement is incorporated herein by
reference.
(d) No loan agreement has yet been entered into.
ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
(a) and (b) The information set forth under the captions "Information About
the Partnership, Its General Partners and Their Affiliates--Ownership of the
Units," "--Market for the Units" and "Information Concerning the Purchaser and
Its Affiliates--Affiliates of the Purchaser" of the Proxy Statement is
incorporated herein by reference.
ITEM 12. THE SOLICITATION OR RECOMMENDATION.
(a)-(c) Excluded.
(d) The information set forth under the captions "Special
Factors--Financing of the Merger--Source of Funds," "The Special Meeting--Votes
Required" and "Related Agreements" of the Proxy Statement is incorporated herein
by reference.
(e) No.
ITEM 13. FINANCIAL STATEMENTS.
(a) The information set forth under the captions "Selected Financial Data"
and "Index to Consolidated Financial Statements" of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
(a) and (b) The information set forth under the captions "Special
Factors--Financing of the Merger--Costs Associated with the Merger" and "The
Special Meeting--Solicitation Procedures" of the Proxy Statement is incorporated
herein by reference.
ITEM 15. ADDITIONAL INFORMATION.
All of the information set forth in the Proxy Statement is incorporated herein
by reference.
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ITEM 16. EXHIBITS.
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EXHIBIT NO. DESCRIPTION
<S> <C>
(a) Preliminary Proxy Statement (Exhibit A).
(b) Not applicable.
(c) Not applicable.
(d)(1) Voting Agreement, dated January 6, 2000 (Exhibit D-1).*
(d)(2) Investment Agreement, dated January 6, 2000 (Exhibit D-2).*
(e) Excluded.
(f) Not applicable.
(g) Not applicable.
(h) Excluded.
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* Previously filed.
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SIGNATURE
After due inquiry and to the best of the undersigned's knowledge and
belief, the undersigned certifies that the information set forth in this
Statement is true, complete and correct.
Dated as of: March, 2000
Krupp Realty Fund, Ltd. - III
By: The Krupp Corporation,
a general partner
By:
--------------------------
Name: Douglas Krupp
Title: President and
Co-Chairman of the
Board of Directors
KRF3 Acquisition Company, L.L.C.
By: KRF Company, L.L.C.,
its sole member
By: The Krupp Family Limited
Partnership - 94,
its sole member
By:
-------------------------------
Name: Douglas Krupp
Title: General Partner
KRF Company, L.L.C.
By: The Krupp Family Limited
Partnership - 94,
its sole member
By:
--------------------------
Name: Douglas Krupp
Title: General Partner
The Krupp Family Limited Partnership - 94
By:
--------------------------
Name: Douglas Krupp
Title: General Partner
The Krupp Corporation
By:
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Name: Douglas Krupp
Title: President and
Co-Chairman of the
Board of Directors
The Krupp Company Limited Partnership - II
By:
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Name: Douglas Krupp
Title: General Partner
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Douglas Krupp
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George Krupp
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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(a) Preliminary Proxy Statement (Exhibit A).
(b) Not applicable.
(c) Not applicable.
(d)(1) Voting Agreement, dated January 6, 2000 (Exhibit D-1).*
(d)(2) Investment Agreement, dated January 6, 2000 (Exhibit D-2).*
(e) Excluded.
(f) Not applicable.
(g) Not applicable.
(h) Excluded.
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* Previously filed.
</TABLE>
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EXHIBIT 99 (A)
As filed with the Securities and Exchange Commission on March 8, 2000
PRELIMINARY COPY
SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A) of
the Securities Exchange Act of 1934
Filed by the registrant / /
Filed by a party other than the registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2))
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting Material under Rule 14a-12
KRUPP REALTY FUND, LTD. - III
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(Name of Registrant as Specified In Its Charter)
THE KRUPP CORPORATION
THE KRUPP COMPANY LIMITED PARTNERSHIP-II
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(Name of Persons Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/X/ Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid: $1,440.10
(2) Form, Schedule or Registration Statement No.: Schedule 13E-3 (File
No. 5-46975)
(3) Filing Party: Krupp Realty Fund, Ltd.-III, KRF3 Acquisition Company,
L.L.C., KRF Company, L.L.C., The Krupp Family Limited Partnership-94,
The Krupp Corporation, The Krupp Company Limited Partnership-II,
Douglas Krupp and George Krupp
(4) Date Filed: January 28, 2000
<PAGE>
N&PS
KRUPP REALTY FUND, LTD. - III
One Beacon Street
Suite 1500
Boston, Massachusetts 02108
Dear Limited Partner:
You are cordially invited to attend a special meeting of unitholders of
Krupp Realty Fund, Ltd. - III, to be held on , 2000 at 10:00 a.m. at
.
At the special meeting you will be asked to consider and vote upon a
proposed merger, described in the accompanying proxy statement, of Krupp Realty
with and into KRF3 Acquisition Company, L.L.C., a Delaware limited liability
company that is associated with the general partners. Under the terms of the
merger, KRF3 is offering you $600 per unit in cash. If the merger is completed,
you will no longer hold any interest in Krupp Realty. The general partners of
Krupp Realty and KRF3, together with the persons or entities which control them,
have determined that the merger transaction is fair to the unitholders
unaffiliated with the general partners or KRF3 and in these unitholders'
interest and therefore recommend that these unitholders vote "FOR" the merger
and the amendment.
The proposed transaction will provide you with the opportunity to liquidate
your investment in Krupp Realty for cash at a price and on terms that the above
parties believe is fair to you. Although the merger, the related merger
agreement and the per unit price to be paid to you have not been reviewed
independently, the general partners believe that they are fair to you for the
reasons set forth in this proxy statement.
Unitholders representing a majority of the limited partnership units must
approve the merger and the amendment to Krupp Realty's partnership agreement.
KRF3 currently has a sufficient number of units to approve the merger. However,
your vote is important no matter how many units you own. Please date, sign and
promptly return the proxy card in the enclosed envelope or by facsimile as
instructed in this proxy statement. If you plan to attend the special meeting in
person, please check the appropriate box on the proxy card. You may change your
vote in person, even if you have previously sent in a proxy.
This proxy statement explains in detail the terms of the proposed merger and
the related transactions. The date of this proxy statement is and was
first mailed to unitholders of Krupp Realty on .
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KRUPP REALTY FUND, LTD. - III
The Krupp Corporation
General Partner
By:
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Douglas Krupp
CO-CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
Boston, Massachusetts
, 2000
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THE TRANSACTION, NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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KRUPP REALTY FUND, LTD. - III
One Beacon Street
Suite 1500
Boston, Massachusetts 02108
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NOTICE OF SPECIAL MEETING OF UNITHOLDERS
TO BE HELD , 2000
------------------------
To Our Limited Partners:
We are holding a special meeting of the holders of investor limited
partnership units of Krupp Realty Fund, Ltd. - III on , 2000, at
, local time, at , for the following purposes:
- To consider and vote on a proposal to approve a merger agreement under
which KRF3 Acquisition Company, L.L.C., a newly-formed company, will merge
with and into Krupp Realty. Each Krupp Realty unitholder other than
certain unitholders that have agreed to reinvest their units in KRF3 will
receive $600 in cash for each outstanding investor limited partnership
unit that the unitholder owns immediately before the effective time of the
merger. A vote in favor of the merger agreement will also constitute a
vote in favor of an amendment to Krupp Realty's partnership agreement
allowing Krupp Realty to enter into the merger agreement and complete the
merger with KRF3. Copies of the merger agreement and amendment are
attached as Appendices A and B, respectively, and are described in the
accompanying proxy statement.
- To consider and act upon such other matters as may properly come before
the special meeting or any adjournment of the meeting.
Only unitholders of Krupp Realty's investor limited partnership interests at
the close of business on the record date, , 2000, will be entitled
to notice of, and to vote at, the special meeting or any adjournment of the
meeting.
KRUPP REALTY FUND, LTD. - III
The Krupp Corporation
GENERAL PARTNER
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<S> <C> <C> <C>
By: ---------------------------------------
Scott D. Spelfogel
SECRETARY
</TABLE>
Boston, Massachusetts
, 2000
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TABLE OF CONTENTS
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PAGE
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<S> <C>
SUMMARY TERM SHEET.......................................... 1
Purpose of the special meeting............................ 1
What you will receive in the merger....................... 1
Purposes of and reasons for the merger.................... 1
Fairness of the merger.................................... 1
Primary potential disadvantages of the merger............. 1
Conflicts of Interest..................................... 2
The amendment............................................. 2
Vote required............................................. 2
Financing of the merger................................... 2
Material federal income tax consequences.................. 3
Market information........................................ 3
Rights of appraisal....................................... 3
INFORMATION ON VOTING....................................... 3
WHO CAN HELP ANSWER YOUR QUESTIONS.......................... 4
SPECIAL FACTORS............................................. 5
Background of the Merger; Purpose of the Transaction...... 5
Alternatives to the Merger................................ 6
Fairness of the Merger.................................... 8
Disadvantages and Risks Associated with the Merger........ 10
Conflicts of Interest..................................... 10
Liquidation Analysis; Determination of Merger Price....... 10
Book Value................................................ 12
Recent Unit Sales; Tender Offer........................... 12
Effects of the Transaction................................ 12
Failure to Approve the Merger............................. 13
Plans or Proposals by Partnership or Affiliates Following
the Merger.............................................. 13
Financing of the Merger................................... 14
Material Federal Income Tax Consequences.................. 15
THE SPECIAL MEETING......................................... 17
Special Meeting; Record Date.............................. 17
Procedures for Completing Proxies......................... 17
Votes Required............................................ 18
Solicitation Procedures................................... 18
Revocation of Proxies..................................... 19
Appraisal Rights.......................................... 19
THE MERGER AGREEMENT........................................ 19
Closing Date; Effective Time of the Merger................ 19
Effects of the Merger..................................... 19
Payment................................................... 20
Authority and Consent of the Purchaser.................... 20
Representations And Warranties of the Parties............. 20
Conditions to the Merger.................................. 20
Termination............................................... 21
Amendment................................................. 21
Waiver.................................................... 21
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Surviving Entity...................................... 21
RELATED AGREEMENTS.......................................... 21
THE AMENDMENT TO THE PARTNERSHIP AGREEMENT.................. 22
Purpose................................................... 22
The Amendment............................................. 22
INFORMATION ABOUT THE PARTNERSHIP, ITS GENERAL PARTNERS AND
THEIR AFFILIATES.......................................... 22
The Partnership........................................... 22
The General Partners...................................... 22
Description of the Assets................................. 23
Distributions............................................. 25
Ownership of Units........................................ 25
Market for the Units...................................... 26
Related Party Transactions................................ 27
SELECTED FINANCIAL DATA..................................... 27
INFORMATION CONCERNING THE PURCHASER AND ITS AFFILIATES..... 28
The Purchaser............................................. 28
Affiliates of the Purchaser............................... 28
WHERE YOU CAN FIND MORE INFORMATION......................... 28
General................................................... 28
Independent Accountants................................... 29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
INDEX TO CONSOLIDATED QUARTERLY (UNAUDITED) FINANCIAL
STATEMENTS................................................ F-15
APPENDIX A--THE MERGER AGREEMENT
APPENDIX B--AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF
LIMITED PARTNERSHIP
OF KRUPP REALTY FUND, LTD. - III
APPENDIX C--FORM OF PROXY CARD
</TABLE>
ii
<PAGE>
SUMMARY TERM SHEET
This summary term sheet highlights selected information included in this
proxy statement, and is qualified by reference to the detailed information
appearing elsewhere in this proxy statement and the attached appendices. Please
carefully review all of the information provided in this proxy statement.
PURPOSE OF THE SPECIAL MEETING
- To approve a merger agreement and related amendment to the partnership
agreement of Krupp Realty Fund, Ltd. - III which allows for the merger to
occur.
WHAT YOU WILL RECEIVE IN THE MERGER
- $600 for each unit you own. You may expect to receive your cash payment
within 15 days following completion of the merger, which is expected to
occur within 30 days following the special meeting.
- This price is based on the analysis conducted by the proposed purchaser of
the partnership, KRF3 Acquisition Company, L.L.C.
- You will no longer have any interest in the partnership after the merger.
See "Special Factors--Liquidation Analysis; Determination of Merger Price."
PURPOSES OF AND REASONS FOR THE MERGER
- Acquiring all of the outstanding units.
- Providing liquidity to you.
- Eliminating current and future market risk from the partnership's
properties related to competition from newly built and renovated
properties.
- Eliminating uncertainties relating to the price and timing of any
disposition of the properties owned by the partnership.
- Eliminating the annual filing and reporting of tax information by you.
FAIRNESS OF THE MERGER
- Based on the liquidation analysis conducted by the purchaser in connection
with the proposed merger, the general partners of the partnership believe
that the merger is fair to, and in the best interest of, unitholders
unaffiliated with the general partners or the affiliates described below
and recommend that these unitholders vote for the approval of the merger.
- Together with the general partners, the purchaser, KRF Company, the sole
member of the purchaser, The Krupp Family Limited Partnership-94, the sole
member of KRF Company, Douglas Krupp and George Krupp are affiliates of
the partnership. The partnership and these affiliates also believe that
the merger is fair to, and in the best interest of, the unitholders
unaffiliated with the general partners or these affiliates and their
decision as to the fairness of the merger is based upon the same factors
considered by the general partners in this regard.
See "Special Factors--Fairness of the Merger."
PRIMARY POTENTIAL DISADVANTAGES OF THE MERGER
- Continued ownership of the units could be more economically beneficial to
you than the merger if the value of the partnership's properties were to
increase.
- A more favorable transaction might be available from a third-party
purchaser of the partnership's properties now or in the future.
1
<PAGE>
- No independent committee or entity negotiated, reviewed or evaluated the
merger consideration offered by the purchaser.
- No independent person has evaluated or rendered any opinion with respect
to the fairness of the merger or merger price to you.
See "Special Factors--Disadvantages and Risks Associated with the Merger."
CONFLICTS OF INTEREST
- The general partners of the partnership have economic and other interests
that conflict with your interests.
- The purchaser is associated with the general partners and desires to pay
you a lower price for your units while you wish to receive a higher price
for your units.
- If the partnership's assets were sold outright, the general partners and
their associates would no longer receive the distributions and fees that
they now receive.
See "Special Factors--Conflicts of Interest."
THE AMENDMENT
- The partnership agreement currently prohibits the partnership from selling
any property to, or entering into agreement or transactions with, a
general partner or with associates, or "affiliates," of a general partner,
except as expressly permitted.
- Because the purchaser is associated with the general partners, you are
being asked to consent to an amendment to the partnership agreement to
allow the partnership to enter into the merger agreement and complete the
merger.
- If the amendment is not approved, the merger will not be completed even if
you approve the merger; consequently, a vote for the merger will
automatically constitute a vote in favor of the amendment.
See "The Amendment to the Partnership Agreement."
VOTE REQUIRED
- Unitholders representing a majority of the units must approve the merger
and the related amendment.
- The purchaser owns and controls approximately 47.9% of the units.
- Other unitholders representing approximately 8.7% of the units have agreed
to vote for the merger and the amendment.
- Consequently, together with these unitholders, the purchaser controls, in
total, approximately, 56.6% of the voting units of the partnership.
See "The Special Meeting--Votes Required."
FINANCING OF THE MERGER
The purchaser expects to finance the merger through capital contributions
from an affiliate and the anticipated refinancing of mortgage indebtedness of
the partnership. See "Special Factors--Financing of the Merger--Source of
Funds."
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Sales of units under the merger will be taxable transactions for federal
income tax purposes. On a sale of units under the merger, you will recognize
gain or loss equal to the difference between:
- your "amount realized" on the sale; and
- your adjusted tax basis in the units sold.
Your "amount realized" will equal the sum of:
- the amount of cash you receive; and
- the amount of partnership liabilities allocable to your units.
The amount of partnership liabilities allocable to each unit is expected to be
equal to $695 as of the end of 1999.
Your adjusted tax basis in the units sold will depend upon the facts of your
situation. The character of any gain or loss you recognize may be partially
capital and partially ordinary.
THE PRECISE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND UPON THE FACTS
OF YOUR SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR.
See "Special Factors--Material Federal Income Tax Consequences."
MARKET INFORMATION
- In December 1999 through February 2000, the purchaser acquired a total of
1,637.5 units from four investment management professionals at a price of
$600 per unit.
- According to The Partnership Spectrum, an independent third-party industry
publication, for the period between October 1, 1999 and November 30, 1999,
ten units traded at $450 per unit.
- In a tender offer completed in June 1999, the purchaser acquired
approximately 41.2% of the outstanding units at $550 per unit, while in
April 1999 a third party had offered $425 per unit.
See "Information About the Partnership, Its General Partners and Their
Affiliates--Market for the Units."
RIGHTS OF APPRAISAL
Neither Massachusetts law nor the partnership agreement grants you appraisal
rights, without regard to how you vote (or abstain) at the special meeting.
See "The Special Meeting--Appraisal Rights."
INFORMATION ON VOTING
PLEASE READ THIS DOCUMENT IN FULL
- Carefully read and consider the information contained in this document.
- Indicate on your proxy card how you want to vote and mail your signed and
dated proxy cared in the enclosed return envelope as soon as possible.
- You may also fax your completed proxy card to Krupp Funds Group at (617)
423-8919.
IF YOU WANT TO CHANGE YOUR VOTE
Send in a later-dated, signed voting form to Krupp Funds Group before the
special meeting or attend the meeting in person and vote.
IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON
- You should send in your proxy card in any event.
- You may request a ticket for admission to the special meeting by marking
the appropriate box on the proxy card and returning it no later than
, 2000.
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WHO CAN HELP ANSWER YOUR QUESTIONS?
After reading through this proxy statement, if you have more questions about
the merger, you should contact:
KRUPP FUNDS GROUP
One Beacon Street
Suite 1500
Boston, Massachusetts 02108
Attention: Investor Services
Phone: 1-800-25-KRUPP
(1-800-255-7877)
Fax: (617) 423-8919
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SPECIAL FACTORS
BACKGROUND OF THE MERGER; PURPOSE OF THE TRANSACTION
The partnership was formed in 1982. In that year 25,000 units were offered
to the public at a price of $1,000 per unit. The general partners believe that
most unitholders have held their investment in the partnership for longer than
their anticipated holding period. The term of the partnership is currently
scheduled to terminate on December 31, 2020, unless it is sooner dissolved or
terminated as provided in the partnership agreement. While the partnership
currently provides investors with a $31.72 annual distribution, other investment
opportunities may offer a rate of return that is as good or better than that
offered by the partnership.
The units are not listed or traded on an exchange or quoted on the National
Association of Securities Dealers Automated Quotation System, and no active
trading market in the units has developed. At the time of the unit offering,
unitholders may have anticipated holding their units for approximatley five
years based upon statements made in the prospectus for the offering. Because of
the limited trading market for the units, unitholders who wish to sell units may
have difficulty doing so, and from time to time, the general partners have been
asked by unitholders to provide a means of disposing of their units at a fair
price.
On April 21, 1999, Madison Liquidity Investors 104, LLC announced an offer
to purchase up to five percent of the outstanding units for $425 per Unit, less
a $50 transfer fee charged by the partnership and any cash distributions made
after April 21, 1999. The Madison offer, together with uncertainties regarding
the partnership's properties described below, caused Mr. Douglas Krupp and
individuals employed by the general partners to decide to seek to acquire the
units at this time. Mr. Krupp contacted Mr. David Quade of The Berkshire Group,
an affiliate of the partnership, regarding the possibility of forming an
investment vehicle that would acquire the outstanding units. At this time, the
parties agreed to explore acquiring the units. On May 14, 1999, the purchaser
commenced a tender offer to purchase all of the outstanding units for $550 per
unit, less any cash distributions made after May 14, 1999. The purchaser chose
to make this offer because (a) it was willing to pay a higher price for the
units than that offered by Madison, (b) it could offer unitholders the
opportunity to benefit from immediate liquidity for all units tendered, (c) it
believed it could offer a price that was fair to unitholders and (d) as noted
below, it, through its affiliates, is engaged in the business of utilizing
capital to, among other things, renovate residential real estate properties.
On June 23, 1999, the purchaser completed its tender offer and purchased
units representing approximately 41.2% of the outstanding units. In November
1999, representatives of the purchaser decided to continue to proceed with its
merger proposal in order to acquire the remaining outstanding units. In December
1999 and January 2000, the purchaser purchased an additional 472 and 649.2
units, respectively, from two investment management professionals. Finally, in
February 2000, the purchaser acquired an additional 516.3 units from two
investment management professionals, increasing its ownership to approximately
47.9% of the oustanding units. See "Information About the Partnership, Its
General Partners and Their Affiliates--Market for the Units."
In November 1999, Mr. Quade of the purchaser initiated contact with
Mr. Eggert Dagbjartsson, a general partner of various investment funds
affiliated with Equity Resources Group, Inc., the holders of approximately 6.1%
of the outstanding units, regarding the possibility of forming a joint venture
to acquire the remaining outstanding units. Following the proposed merger and
based upon the recapitalization of the partnership, Equity Resources will own
approximately an 11% interest in the purchaser.
Equity Resources was approached because of its considerable experience in
evaluating the benefits and risks associated with continued ownership of the
partnership's properties. Formed in 1982, Equity Resources holds interests in
over 1,500 separate partnerships involved in all facets of the real estate
business as long-term investments and has invested over $100 million in real
estate business holdings. The purchaser expects to utilize this experience by
discussing with Equity Resources from time to time
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matters relating to the partnership's properties. In this regard, the purchaser
hopes to benefit from Equity Resources' real estate management experience.
During November and December 1999, Mr. Quade and Mr. Dagbjartsson negotiated
the terms of their joint venture, and on January 6, 2000, executed an investment
agreement setting forth the terms of their agreements regarding the merger and
the operation of the partnership's properties following the merger. See "Related
Agreements." In connection with the execution of these agreements, Equity
Resources agreed to vote in favor of the merger and the amendment to the
partnership's partnership agreement allowing the partnership to complete the
merger with the purchaser. Equity Resources also agreed to reinvest their
outstanding units as a capital contribution to the purchaser. In turn, KRF
Company agreed to contribute the units it owns to the purchaser and to make a
cash contribution of up to $1.0 million in exchange for its interest and the
existing mortgage indebtedness of the partnership would be refinanced. The
purchaser has contacted other unitholders who are engaged in the business of
real estate management and development regarding their interest in reinvesting
units in the purchaser on the same terms as Equity Resources, but has reached no
understandings or agreements.
The purpose of the merger is for the purchaser to acquire all of the
outstanding units, while providing unitholders with the opportunity to liquidate
their investment in the partnership for cash at a fair price.
The purchaser's decision to proceed with the merger at this time is based
upon its belief that current market conditions are favorable for its purchase
and financing of the outstanding units at a merger price that is attractive to
unitholders.
If the merger is completed, unitholders will have the opportunity to
liquidate their investment at a 41.2% premium above the Madison April 1999
tender offer. The per unit merger price is also 9% higher than the purchaser's
May 1999 tender offer. See "--Recent Unit Sales; Tender Offer."
As described below under "--Continuation of the Partnership," the general
partners intend to refinance the properties and utilize loan proceeds to
implement the capital plan and establish reserves for future capital
improvements. Increasing the leverage on the properties may increase the risk of
unitholders' investment in the properties and decrease net cash flow,
potentially adversely affecting the timing and amount of future distributions to
the unitholders.
ALTERNATIVES TO THE MERGER
The general partners considered two primary alternatives to the merger: (1)
the continued ownership of the properties by the partnership and (2) the sale of
one or more of the properties by the partnership and the distribution of the net
proceeds of the sales to the unitholders.
CONTINUATION OF THE PARTNERSHIP
The partnership owns and operates the Brookeville apartments in Columbus,
Ohio and the Hannibal Grove apartments and Dorsey's Forge apartments in
Columbia, Maryland. The Brookeville apartments, the Hannibal Grove apartments
and the Dorsey's Forge apartments were constructed in 1972, 1970 and 1970,
respectively, and, except for a partial interior renovation of the Brookeville
apartments completed in 1998, have not undergone significant renovation. For a
description of these properties, see "Information About the Partnership, Its
General Partners and Their Affiliates--Description of the Assets."
The managing agent of the properties, an affiliate of the general partners
and the purchasers, believes that increased competition resulting from newly
constructed or renovated housing entering the markets served by the properties
is expected to continue over the next several years. In Columbus, Ohio, for
example, market research reports state that approximately 10,000 new units are
under construction and an additional 16,000 units are proposed. In Columbia,
Maryland, approximately 200 new units have entered the market in the past year,
with approximately 2,300 units currently undergoing renovation.
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<PAGE>
In March 1999, the managing agent prepared a five-year capital improvement
plan setting forth capital improvements that it believed a third-party purchaser
of the properties would regard as necessary to maintain the properties' current
occupancy and rent levels, subject to inflationary increases, in light of the
increased competition in the markets served by the partnership. These capital
improvements include interior rehabilitation, replacement of windows, roofs,
appliances, piping and HVAC systems, as well as improvements to parking lots,
fences and exterior painting. The managing agent originally estimated the
aggregate cost of implementing this five-year capital plan to be $10.0 million.
However, after re-evaluating the capital plan and in light of the current market
and economic conditions, the aggregate cost of implementing the five-year
capital plan is currently estimated to be approximately $7.0 million. The
managing agent advised the purchaser that in view of the new or newly renovated
housing alternatives in the areas served by the properties, the current
occupancy rates enjoyed by the partnership might not be sustained unless the
capital plan is implemented, particularly since many of the newer residential
units will have amenities such as fitness centers, tennis courts and swimming
pools that the two Columbia properties do not.
The general partners are presently implementing the capital plan, which they
expect to complete over a five-year period. Implementation of the capital plan
will require the investment of additional equity capital, additional borrowings
and/or the reduction of future cash distributions from the partnership.
As noted above, the general partners believe that the duration of most
unitholders' investments in the partnership's properties has exceeded their
initial estimated holding periods, and that providing a means for unitholders to
liquidate their investment is consistent with the desire of many of the
unitholders, particularly in light of the limited and sporadic secondary market
for the units.
SALE OF THE PARTNERSHIP'S PROPERTIES
The general partners believe that a sale of the properties owned by the
partnership through a solicitation of third-party bids or an auction would not
necessarily result in a more favorable transaction for unitholders. A
third-party transaction could require the payment of transaction costs far in
excess of costs incurred by the partnership in the merger, all of which would be
borne by the partnership, and these costs would reduce the amount received by
each unitholder in respect of his or her units. The partnership would likely be
required to retain a portion of the proceeds of a third-party sale to cover the
expenses related to ongoing administration of the partnership and to fund
possible post-closing liabilities to a third-party purchaser. Under the terms of
the proposed merger agreement, the partnership will not make any representations
regarding its properties, and following the completion of the merger,
unitholders' proceeds will not be reduced by claims relating to contingent
liabilities of the properties.
Although the general partners do not believe that the solicitation of
third-party bids would necessarily result in a more favorable transaction for
unitholders, there is no assurance that unitholders would not ultimately receive
more for their units as a result of the sale of the properties to a third party
who was able to consummate this type of a transaction.
THIRD-PARTY TENDER OFFER
From time to time, unitholders have been approached by investors seeking to
acquire units. Based on analyses of the proposals and general market
information, the general partners have concluded that these offers are generally
made at prices that are significantly less than the fair value per unit. For
instance, in the Madison tender offer described above, unitholders were offered
a price of $425 per unit, approximately 41.2% less than the merger price offered
by the purchaser. The general partners recommended that unitholders decline this
offer.
7
<PAGE>
FAIRNESS OF THE MERGER
THE GENERAL PARTNERS RECOMMEND THAT UNITHOLDERS VOTE FOR THE MERGER AND THE
RELATED TRANSACTIONS. Although the amount to be paid to unitholders following
the merger is not the result of arm's-length negotiations between the purchaser
and the partnership and is subject to conflicts of interest, the general
partners, the partnership and its affiliates noted above under "Summary Term
Sheet--Fairness of the Merger" believe that the per unit merger price and the
other terms of the merger are fair to unitholders other than the general
partners or these affiliates. Therefore, the general partners recommend that
unitholders vote "FOR" the merger. The general partners based their conclusion
on the following:
- The merger price is based on the analyses conducted by the purchaser,
employing varying assumptions that the purchaser believes are reasonable
in light of the general economic conditions, condition of the
partnership's properties and the markets in which the properties are
located.
- Implementation of the capital plan described above will require the
investment of additional equity capital, additional borrowings and/or the
reduction of future cash distributions from the partnership. This may
result in the partnership increasing the amount of debt it maintains
relative to its assets and equity, thereby presenting an increased
financial risk to unitholders that is higher than what they have assumed
previously.
- The purchaser's belief that changing market conditions, including as a
result of new construction or renovations to existing properties competing
with the properties, may adversely affect the future cash flows generated
by the properties unless capital improvements are effected.
- The purchaser recently acquired a total of 1,637.5 units at $600 per unit
from four investment management professionals, which may be an indication
of the current market value of the units. Investment management
professionals generally are sophisticated investors that invest on a
regular basis and have access to numerous financial sources. Thus, the
amount at which they are willing to invest, or sell, their interests may
suggest a price which incorporates all of the available market
information, financial or otherwise, concerning the partnership. In this
instance, the per unit price paid to these investment professionals was
negotiated and is the same as the $600 per unit being offered by the
purchaser.
- The fact that the $600 per unit merger price is $175, or 41.2%, higher
than the $425 per unit price offered by Madison in its April 1999 tender
offer. The per unit merger price is also $50 per unit, or nine percent,
higher than the $550 per unit price offered by the purchaser in its
May 1999 tender offer, which was based on the liquidation analysis
conducted by the purchaser at the time and reflected the then-current
market conditions. See "--Recent Unit Sales; Tender Offer."
- The merger will eliminate the uncertainties relating to the amount and
timing of any liquidation of the partnership following the sale of its
properties, which will depend upon the then-current markets for the
properties, as well as upon amounts that would be required to be reserved
to satisfy contingent liabilities associated with these sales. In other
words, absent the merger unitholders may receive a lesser amount for their
units upon a sale of the properties than the $600 per unit being offered
by the purchaser, while the timing of any sale and thus unitholders'
receipt of any proceeds thereof is subject to uncertainties inherent in a
third-party sale process. Furthermore, by transferring their units for
cash now, unitholders will have the opportunity to redeploy investment
assets into alternative and potentially more liquid investments.
- Because there is no formal trading market for the units, they can be
difficult to sell. The merger provides unitholders with the opportunity to
immediately sell their units for what the general partners believe is a
fair price without the commissions or broker's fee of a secondary market
sale and without any transfer fees, thereby increasing the per unit amount
that would otherwise be realized by unitholders.
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- Because the transaction is structured as a merger, cash proceeds will be
paid directly to unitholders by the purchaser and all of the assets and
liabilities of the partnership will be transferred to the purchaser
immediately upon the merger. As a result, the partnership is not required
to continue operations or to escrow funds to fund possible post-closing
liabilities. A sale of the properties, as opposed to a merger, would
require the partnership to continue operating for an uncertain time period
before distributing the cash consideration received to the unitholders.
Additionally, it would be difficult to predict with any precision the
amount ultimately realized by unitholders, as the amount of post-closing
liabilities is difficult to determine.
- Although the partnership's properties are in good condition, they are now
more than 27 years old and will require refurbishing in the future to
remain competitive. This could require the partnership to borrow
additional funds, thereby decreasing future cash flows and increasing the
risk of unitholders' investment in the partnership. In the merger,
unitholders would receive $600 per unit irrespective of any future
expenditures or indebtedness.
- The merger is not subject to a financing contingency, which increases the
likelihood that unitholders who desire to realize liquidity will be able
to do so.
- As a result of the purchaser's affiliation with the general partners, the
purchaser is familiar with the condition of the partnership's properties
and thus is willing to assume all of the assets and liabilities of the
partnership on terms and conditions that would be extremely uncommon for a
third-party purchaser, including the absence of representations and
warranties about the properties, the absence of any indemnification
protection and the lack of any financing contingency. If the partnership
were to sell the properties to a third party, a portion of the proceeds
would have to be retained to fund contingent liabilities, thereby delaying
unitholders' ability to realize the full value of the sale.
In determining the fairness of the merger price to unaffiliated unitholders,
and related terms to unaffiliated unitholders, the general partners did not find
it practicable to quantify or otherwise attach relative weights to the specific
factors described above. In making their determination as to the fairness of the
merger price to unaffiliated unitholders, the partnership and its affiliates
noted above under "Summary Term Sheet--Fairness of the Merger" relied on the
same factors considered by the general partners in this regard as described
above.
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DISADVANTAGES AND RISKS ASSOCIATED WITH THE MERGER
Unitholders should note that the affiliates of the general partners may
benefit from the merger. This is most likely to occur if the properties are
ultimately sold by the purchaser for an amount greater than the per unit price
being offered to unitholders. The general partners considered the following
potential disadvantages and risks to the unitholders if the merger is completed:
- Continued ownership of the units could be more economically beneficial to
unitholders than the merger if the value of the properties were to
increase.
- A more favorable transaction might be available from a third-party
purchaser of the partnership's properties now or in the future.
- No independent committee or entity negotiated, reviewed or evaluated the
merger consideration offered by the purchaser.
- No independent person has evaluated or rendered any opinion with respect
to the fairness of the merger or merger price to unitholders.
- The purchaser already has sufficient voting power to approve the merger
proposal without the consent of any other unitholder.
- Unitholders will not be offered appraisal rights or dissenters' rights in
connection with the merger.
- Unitholders may incur tax liabilities as a result of the merger.
CONFLICTS OF INTEREST
The general partners faced conflicts of interest with respect to the merger
that may be in conflict with the economic interest of the unitholders.
Specifically, there is a conflict between the desire of the purchaser, an
affiliate of the general partners, to pay unaffiliated unitholders a lower price
in exchange for units cancelled in the merger and the desire of unaffiliated
unitholders to receive a higher price in exchange for their units.
The general partners also have an indirect economic interest in completing
the merger, as opposed to a sale or liquidation of the partnership's assets to a
third party, because a third-party sale or liquidation would eliminate (a) the
distributions received by the general partners in respect of their indirect
interests in the partnership's properties and (b) the fees paid to their
affiliates for services provided to the partnership. See "Information About the
Partnership, Its General Partners and Their Affiliates--Related Party
Transactions."
Unitholders were not independently represented in the negotiation of the
merger agreement, no independent person or committee has evaluated or rendered
any opinion with respect to the fairness of the per unit price to be paid to
unitholders and the merger is not structured so that approval of at least a
majority of the unitholders other than the purchaser and its affiliates (which
together own approximately 47.9% of the units) is required. While the purchasers
and its affiliates believe that the merger price is fair, and that these
procedures were not required to achieve this price, there is no assurance that a
more favorable merger price could not have been obtained had one or more of
these procedural safeguards been utilized.
LIQUIDATION ANALYSIS; DETERMINATION OF MERGER PRICE
The purchaser determined that the fair value of each unit falls within a
range of $573 to $634 based upon the liquidation analysis described below. The
purchaser calculated this range on the basis of its estimate of the proceeds
that could be realized from the sale of the partnership's properties and the
partnership's other assets, less mortgage debt and other liabilities. To
determine the prices at which
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the properties could be sold by the partnership, the purchaser applied
capitalization rates between 9.45% and 9.85% to varying projections of the net
cash flow expected to be generated by the properties in 2000, adjusted to
reflect factors that a third-party purchaser would consider relevant in
evaluating the purchase of the properties, and then subtracted amounts related
to implement the capital improvements plan discussed above under "--Alternatives
to the Merger--Continuation of the Partnership" and transaction costs associated
with the purchase of the properties.
In deriving the net cash flow attributable to the properties, the purchaser
made the following adjustments to and estimates of cash flow: (a) an increase to
net operating income to reflect varying growth rates between 1.5% and 5.5% per
annum over 1999 levels, offset by vacancy at a rate of 7.0%; and
(b) adjustments to expenses associated with the properties following a sale to a
third party, including insurance costs, replacement reserves and management
fees. This resulted in estimated aggregate cash flows for the properties between
$3.85 million and $4.0 million, as set forth in the following table:
<TABLE>
<CAPTION>
LOW 2000 MIDDLE 2000 HIGH 2000
PROPERTY ESTIMATE ESTIMATE ESTIMATE
- -------- ---------- ----------- ----------
<S> <C> <C> <C>
Brookville apartments.................................... $1,405,443 $1,429,875 $1,460,415
Dorsey's Forge apartments................................ $ 961,247 $ 977,820 $ 998,845
Hannibal Grove apartments................................ $1,484,561 $1,510,157 $1,542,628
---------- ---------- ----------
TOTAL.............................................. $3,851,251 $3,917,852 $4,001,888
========== ========== ==========
</TABLE>
After arriving at the estimated aggregate cash flows for the properties, the
purchaser applied capitalization rates between 9.45% and 9.85% and deducted
(a) estimated closing costs associated with the sales of 3% and (b) the
estimated cost of capital improvements of approximately $7.0 million to arrive
at an aggregate gross value of the properties between $32.0 million and $33.47
million. The addition of approximately $1.8 million of cash and other assets of
the partnerships less $18.3 million of mortgage debt, $330,000 of expected
prepayment penalties and $790,000 of other liabilities associated with the
partnership, resulted in a value range for the units between $573 and $634.
Projections are by their nature speculative and no assurance can be given
that a projection will accurately reflect the rental income actually achieved. A
capitalization rate is a rate of return commonly applied by buyers of real
estate to property income to determine the present value of property income. The
choice of capitalization rate is subjective and based on, among other things, a
buyer's evaluation of a property's location and condition. The lower the
capitalization rate utilized, the higher the value produced, and the higher the
capitalization rate utilized, the lower the value produced. The purchaser
utilized capitalization rates between 9.45% and 9.85% to determine the value of
the partnership's properties. It employed these rates based on the purchaser's
experience in the real estate marketplace and with a view toward what is
commercially reasonable.
The Madison offer described above utilized a capitalization rate of 12.43%,
which Madison at the time stated was within the range of capitalization rates
employed in the marketplace for apartment buildings of the properties' age and
quality. In connection with a third-party tender offer in 1996, the general
partners estimated the value of a unit at $661 utilizing capitalization rates
from 9.5% to 10.0%. This valuation was based on market and other conditions at
the time, and did not reflect the current market conditions and the expenditures
that would be required to implement the capital improvements plan.
Although the purchaser believes that the values calculated utilizing the
method described above fairly represent the value of the partnership's
properties and the value of the units, an actual sale of the properties at this
time or in the future might generate a sale price either higher or lower than
the range of values calculated above.
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Further, the purchaser believes that the per unit proceeds which would be
realized by unitholders upon a liquidation of the properties would be further
reduced by contingent liabilities associated with the properties. The range of
values estimated above does not take into account timing considerations, market
uncertainties and legal and other expenses that would be incurred in connection
with a liquidation of the partnership. An actual liquidation of the partnership
now, or in the future, might generate a higher or lower value for each unit.
The general partners have not yet determined how the partnership would
respond to the market developments described above in the event the proposed
merger and the transactions contemplated by it are not completed. However, in
the event the general partners determine to sell the properties in the future,
the proceeds of a sale would be subject to uncertainties in the real estate and
financing markets at the time, as well as to possible adverse effects upon the
cash flows generated by the properties by the additions to the housing base in
the markets served by the properties.
In view of the developments occurring in the markets described above and the
expenditures required by the capital improvements plan, the purchaser believes
that the liquidation analysis described above is the most appropriate valuation
methodology.
BOOK VALUE
Because the partnership's principal assets, its real estate properties, are
carried on the partnership's balance sheet at their historical cost and have
been depreciated over the sixteen years of the partnership's existence, the net
book value of a unit is a negative number, and therefore the purchaser does not
believe net book value is meaningful in determining the fairness of the merger
price.
RECENT UNIT SALES; TENDER OFFER
The $600 per unit price to be paid to unitholders in the merger is almost
double the $315 per unit tender offer made by Krescent Partners L.L.C. on
November 26, 1996 and $175, or 41.2%, higher than the Madison offer. In
addition, the merger price is $50 per Unit higher than the $550 per unit price
offered by the purchaser in its May 1999 tender offer and to Smithtown Bay,
L.L.C. a professional investor which sold 472 units to the purchaser in December
1999 at the $550 per Unit price. In January 2000, the purchaser bought 649.2
units from Krescent Partners at a price of $600 per unit. In addition, Smithtown
Bay is entitled to receive an additional $50 per unit for the units it
previously sold to the purchaser (the difference between the $600 per unit
merger price and the $550 per unit price Smithtown Bay received for its units).
Finally, in February 2000, the purchaser acquired an additional 496.3 units and
20 units, respectively, at $600 per unit from American Realty Holdings I, L.P.
and Longacre Corporation.
EFFECTS OF THE TRANSACTION
EFFECT ON THE PARTNERSHIP
If the merger is approved and the remaining conditions to the merger are met
or waived, the merger will be effected by filing certificates of merger with the
Delaware Secretary of State and the Massachusetts Secretary of State. As a
result, the assets and liabilities of the partnership will be transferred to the
purchaser as the surviving entity in the merger and the partnership will cease
to exist. The benefits and risks associated with ownership of the properties
will then rest solely with the purchaser.
Following the merger, the partnership will cease to be a public company and
will not file reports under the Securities Exchange Act of 1934 or be subject to
the rules under it.
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EFFECTS ON THE UNITHOLDERS
As a result of the merger, each unit of the unaffiliated unitholders will be
cancelled in exchange for a $600 cash payment, without interest, payable by the
purchaser to the unitholder upon receipt by the purchaser of the appropriate
forms from the unitholder. Following the completion of the merger, the
unitholders will cease to be owners of the partnership and will no longer have
the potential benefits and risks associated with ownership. Unitholders will
forego the opportunity to continue to participate as investors in the
partnership, including the right to distributions and potential appreciation of
its assets over time.
Unitholders will recognize a gain or loss on the conversion of units into
cash in the merger to the extent of the difference between the amount realized
and the unitholder's adjusted basis in the units sold. See "--Material Federal
Income Tax Consequences."
EFFECTS ON THE GENERAL PARTNERS AND THE PURCHASER
The general partners will not receive any payment in exchange for the
redemption of their general partnership or original limited partnership
interests nor will they receive any fees from the partnership in connection with
the merger. Following the merger, the purchaser will continue to pay management
fees to an affiliate of the general partner as described below under
"Information About the Partnership, Its General Partners and Their
Affiliates--Related Party Transactions." An affiliate of the general partners
will manage and control and have an approximate 89% ownership interest in the
purchaser and thus will benefit from any returns the purchaser receives from its
investment in the partnership's properties, whether from operating the
properties, selling the properties or otherwise.
FAILURE TO APPROVE THE MERGER
If the merger is not approved by unitholders, the general partners will
continue to operate the partnership in accordance with the terms of the
partnership agreement and in fulfillment of their fiduciary duties. The
partnership may (1) continue to hold the partnership's properties,
(2) refinance any or all of the properties and utilize the proceeds of the
refinancing to implement the capital improvements plan, (3) solicit offers from
potential purchasers to acquire any or all of the properties, through bid
solicitation, auction or otherwise or (4) pursue other strategies intended to
enhance the value of the unitholders' investment in the partnership.
PLANS OR PROPOSALS BY PARTNERSHIP OR AFFILIATES FOLLOWING THE MERGER
Following the completion of the merger, the purchaser intends to review the
partnership and its assets, the capital improvements plan, distribution policy,
capitalization, operations, properties, policies, management and personnel and
consider what further changes, if any, would be desirable in light of the
circumstances which then exist. Based on its evaluation, the purchaser may
finance all or a portion of the capital improvements by the following means,
alone or in combination: (a) an equity or capital contribution to the
partnership, (b) a refinancing of the properties or (c) a sale of a portion of
the partnership's assets. The purchaser reserves the right to accelerate, extend
or amend the capital improvements plan, and may elect not to implement the
improvements or any portion of them.
The purchaser's determinations will depend on, among other things, general
economic conditions, the conditions of the real estate markets in which the
properties are located, the physical condition of the partnership's properties
at the time the proposed merger is completed, the properties' vacancy rates at
the time the proposed merger is completed, prepayment penalties associated with
each of the respective loan facilities encumbering the properties and the terms
available to the partnership for new financing arrangements. The purchaser
intends to review the partnership's policy with respect to distributions and
may, based on its assessment, reduce or eliminate the distributions paid by the
partnership.
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The purchaser does not have any specific plans for the sale or disposition
of the properties or any material change in the business of the partnership
following the merger. The purchaser will, however, evaluate any proposals and
may sell or dispose of its assets if attractive terms are offered. Presently,
there are no arrangements or proposals to do so. Following the completion of the
proposed merger, the purchaser presently intends to conduct the business and
operations of the partnership substantially as they are currently conducted.
Under the agreements entered into in connection with the merger, Equity
Resources, which following the merger will own approximately 11% of the
purchaser, may require the managing members of the purchaser to cause the
purchaser to attempt to sell the partnership's properties at any time during the
six-month period following the fifth anniversary of the completion of the
merger. See "Related Agreements."
FINANCING OF THE MERGER
SOURCE OF FUNDS
The aggregate consideration to be paid to unitholders is approximately $6.9
million. Of this amount, up to $1.0 million will be in the form of a capital
contribution from KRF Company, L.L.C. to the purchaser and the remainder will be
obtained from the anticipated refinancing of existing mortgage indebtedness, to
approximately 75% to 80% leverage, of the partnership.
It is anticipated that the purchaser will obtain financing from Reilly
Mortgage Capital Corporation under loans to be secured by each of the
partnership's properties, which loans will then be assigned to the Federal
National Mortgage Association, or "Fannie Mae". It is expected that the loan
proceeds will be used to acquire the outstanding units, refinance existing debt,
including prepayment penalties of approximately $334,000, and pay associated
closing costs. The purchaser expects to have a signed commitment letter by the
date of the special meeting.
The purchaser expects to borrow approximately $27 million. The proposed
terms of the loans are 60 to 84 months, with a proposed amortization schedule of
360 months. It is anticipated that the loans will bear an adjustable interest
rate as provided by Fannie Mae. It is proposed that the interest rate index
shall be based on the three-month London Interbank Offered Rate, or "LIBOR,"
plus a spread. The interest rate will change every three months based upon the
LIBOR index.
It is anticipated that the loans will be prepayable in the future, together
with a prepayment premium. The purchaser expects to pay origination fees related
to the loans and third-party costs relating to surveys, title insurance and
other closing costs. It is further anticipated that the loan agreements will
contain customary restrictive covenants and events of default. If the financing
described above is not available, the purchaser anticipates that it would be
able to obtain altenative financing for the merger, but has made no arrangements
for any alternative financing.
KRF Company has previously contributed 11,991.5 units as a capital
contribution to the purchaser while Equity Resources will contribute 1,524 units
currently held by them in the partnership as a capital contribution to the
purchaser. KRF Company will finance its capital contributions to the purchaser
through capital contributions from an affiliate of the general partners which
has available sufficient amounts of liquid capital necessary to fund the
obligations of KRF Company to the purchaser in respect of the merger
consideration.
COSTS ASSOCIATED WITH THE MERGER
It is expected that approximately $6.9 million will be required to finance
the merger, and approximately $575,500 will be required to pay related fees and
expenses. The following is an itemized
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statement of the approximate amount of all expenses incurred or to be incurred
in connection with the merger:
<TABLE>
<S> <C>
Financing costs............................................. $353,000
Legal fees.................................................. 100,000
Printing and mailing costs.................................. 15,000
Accounting.................................................. 10,000
Title, survey and environmental reports..................... 27,000
Title insurance............................................. 46,000
Proxy solicitation fees..................................... 22,000
Other, including filing fees................................ 2,500
--------
Total..................................................... $575,500
========
</TABLE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of material federal income tax
consequences of a sale of units under the merger assuming that the partnership
is a partnership for federal income tax purposes and that it is not a "publicly
traded partnership" as defined in Section 7704 of the Internal Revenue Code of
1986. This summary is based on the Internal Revenue Code, applicable Treasury
Regulations under it, administrative rulings, practice and procedures and
judicial authority as of the date of this proxy statement. All of the foregoing
are subject to change, and any change could affect the continuing accuracy of
this summary. This summary does not discuss all aspects of federal income
taxation that may be relevant to a particular unitholder in light of the
unitholder's specific circumstances or to specific types of unitholders subject
to special treatment under the federal income tax laws, for example, foreign
persons, dealers in securities, banks, insurance companies and tax-exempt
organizations. This summary also does not discuss any aspect of state, local,
foreign or other tax laws. Sales of units under the merger will be taxable
transactions for federal income tax purposes and may also be taxable
transactions under applicable state, local, foreign and other tax laws.
EACH UNITHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO THE UNITHOLDER OF SELLING UNITS UNDER THE MERGER.
CONSEQUENCES TO UNITHOLDERS
A unitholder will recognize gain or loss on a sale of units under the merger
equal to the difference between (1) the unitholder's "amount realized" on the
sale and (2) the unitholder's adjusted tax basis in the units sold. The "amount
realized" with respect to units sold under the merger will be a sum equal to the
amount of cash received by the unitholder for the units plus the amount of
partnership liabilities allocable to the units, as determined under Internal
Revenue Code Section 752. A unitholder's adjusted tax basis in units sold under
the merger will vary depending upon the unitholder's particular circumstances,
and will be affected by allocations of partnership income, gain or loss, and by
any cash distributions made by the partnership to a unitholder with respect to
its units. In this regard, unitholders will be allocated a pro rata share of the
partnership's taxable income or loss with respect to units sold under the merger
through the effective date of the sale.
In general, the character, as capital or ordinary, of a unitholder's gain or
loss on a sale of units under the merger will be determined by allocating the
unitholder's amount realized on the sale and the unitholder's adjusted tax basis
in the units sold between "Section 751 items," which are "inventory items" and
"unrealized receivables" (including depreciation recapture) as defined in
Internal Revenue Code Section 751, and non-Section 751 items. The difference
between the portion of the unitholder's amount realized that is allocable to
Section 751 items and the portion of the unitholder's adjusted tax
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basis in the units sold that is so allocable will be treated as ordinary income
or loss. The difference between the unitholder's remaining amount realized and
remaining adjusted tax basis will be treated as capital gain or loss assuming
the units were held by the unitholder as capital assets.
A unitholder's capital gain or loss, if any, on a sale of units under the
merger will be treated as long-term capital gain or loss if the unitholder's
holding period for the units exceeds one year.
Under current law, which is subject to change, long-term capital gains of
individuals and other non-corporate taxpayers generally are taxed at a maximum
marginal federal income tax rate of 20%, or 25% on recapture of the amount of
accelerated depreciation on real property, whereas the maximum marginal federal
income tax rate for other income of these persons is 39.6%. Capital losses are
deductible only to the extent of capital gains, except that non-corporate
taxpayers may deduct up to $3,000 of capital losses in excess of the amount of
their capital gains against ordinary income. Excess capital losses generally can
be carried forward to succeeding years--a corporation's carryforward period is
five years and a non-corporate taxpayer can carry forward such losses
indefinitely; in addition, corporations, but not non-corporate taxpayers, are
generally allowed to carry back excess capital losses to the three preceding
taxable years.
Under Internal Revenue Code Section 469, a non-corporate taxpayer or
personal service corporation can deduct passive activity losses in any year,
other than the year in which the taxpayer's entire interest in the activity is
disposed of, only to the extent of such person's passive activity income for
such year, and closely held corporations may not offset these losses against
so-called "portfolio" income. A unitholder with "suspended" passive activity
losses, i.e., net tax losses in excess of statutorily provided "phase-in"
amounts, from the partnership generally will be entitled to offset these losses
against any income or gain recognized by the unitholder on a sale of his units
under the merger.
Gain realized by a foreign unitholder on a sale of a unit under the merger
will be subject to federal income tax. Under Section 1445 of the Internal
Revenue Code, the transferee of a partnership interest held by a foreign person
generally is required to deduct and withhold a tax equal to 10% of the amount
realized on the disposition. The purchaser will withhold 10% of the amount
realized by a foreign unitholder from the price payable to the foreign
unitholder. Amounts withheld would be creditable against a foreign unitholder's
federal income tax liability and, if in excess of the liability, a refund could
be obtained from the Internal Revenue Service by filing a U.S. income tax
return.
Unless an exemption applies under applicable law and regulations concerning
"backup withholding" of U.S. federal income tax, the purchaser will be required
to withhold, and will withhold, 31% of the gross proceeds otherwise payable to a
unitholder or other payee pursuant to the merger unless the unitholder or other
payee provides its taxpayer identification number (social security number or
employee identification number) and certifies that this number is correct, or
certifies that it is awaiting a taxpayer identification number. To prevent the
imposition of backup federal income tax withholding on payments made to certain
unitholders with respect to the purchase price of units purchased under the
merger, a tendering unitholder must provide the purchaser with the holder's
correct taxpayer identification number and certify that the unitholder is not
subject to backup federal income tax withholding by completing the Substitute
Form W-9 included in the letter of transmittal.
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THE SPECIAL MEETING
SPECIAL MEETING; RECORD DATE
Under Massachusetts partnership law and the partnership agreement, the
merger and the amendment requires approval of a majority of the holders of
outstanding units. A special meeting of the unitholders will be held on
, 2000, at , at local time, to consider and vote upon the merger
and the amendment to the partnership's partnership agreement. In accordance with
the partnership agreement, the close of business on , 2000 has been
established as the record date for the special meeting. Under the terms of the
partnership agreement, only the unitholders of record on the record date are
eligible to vote those units on the proposals set forth in this proxy statement.
A unitholder of record as of the record date will retain the right to vote on
the proposals set forth in this document even if the unitholder sells or
transfers its units after the record date. As of the record date, the
partnership had 25,000 units outstanding and entitled to vote, held of record by
588 unitholders. A list of the unitholders entitled to vote at the special
meeting will be available for inspection at the executive offices of the
partnership at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. Under
the partnership agreement, valid voting requires a quorum constituted by a
majority in interest of the unitholders voting at the special meeting in person
or by proxy.
Even if a unitholder intends to attend the special meeting in person, they
are requested to complete and return the enclosed proxy card promptly.
PROCEDURES FOR COMPLETING PROXIES
Accompanying this proxy statement is a proxy card solicited by the general
partners for use at the special meeting. When a proxy card is returned, properly
executed, the units represented by it will be voted at the special meeting by
the general partners in the manner specified on the proxy card. It is important
that unitholders mark, sign and date their proxy card and return it either in
the enclosed, postage-prepaid envelope or by facsimile as instructed below to
Krupp Funds Group as soon as possible. When voting a proxy by facsimile, both
sides of the proxy must be transmitted. Delivery of a proxy does not prohibit
unitholders from attending the special meeting. To be properly executed, the
proxy card must be signed by and bear the date of signature of the unitholder
voting the units represented by the card. All questions as to the form of
documents and the validity of consents will be determined by the general
partners, which determinations shall be final and binding. The general partners
reserve the right to waive any defects or irregularities in any proxy.
Each unit entitles the holder thereof to one vote with respect to the
proxies solicited by this document. Only unitholders of record on the record
date may grant a proxy with respect to their units.
IF UNITS STAND OF RECORD IN THE NAMES OF TWO OR MORE PERSONS, ALL PERSONS
MUST SIGN THE PROXY CARD. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE THE FULL TITLE OF THE POSITION HELD. IF A
CORPORATION, THE PROXY SHOULD BE SIGNED BY THE PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN THE PARTNERSHIP'S NAME BY AN
AUTHORIZED PERSON. IF A UNITHOLDER'S UNITS ARE HELD IN THE NAME OF A BROKERAGE
FIRM, BANK, NOMINEE OR OTHER INSTITUTION, ONLY THIS INSTITUTION CAN SIGN A PROXY
WITH RESPECT TO THE UNITS AND CAN DO SO ONLY AT THE UNITHOLDER'S DIRECTION.
ACCORDINGLY, IF ANY UNITS ARE SO HELD, UNITHOLDERS SHOULD CONTACT THEIR ACCOUNT
REPRESENTATIVE AND GIVE INSTRUCTIONS FOR A PROXY TO BE SIGNED WITH RESPECT TO
THEIR UNITS.
A unitholder in favor of the merger and the amendment to the partnership's
partnership agreement should mark the "for" box on the enclosed proxy card, date
and sign the proxy and either mail it promptly in the enclosed postage-prepaid
envelope or fax a copy to Krupp Funds Group as instructed below. If a proxy card
is executed but no indication is made as to what action is to be taken, it will
be deemed to constitute a vote "for" the merger and "for" the amendment. By
consenting to the merger and the amendment, the unitholders irrevocably appoint
the general partners, or their designee,
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as their attorney-in-fact to execute and deliver those documents as are
necessary to effect the merger and the amendment.
Questions and requests for assistance or for additional copies of this proxy
statement and the proxy card may be directed to the partnership's solicitation
agent, Krupp Funds Group, One Beacon Street, Suite 1500, Boston, Massachusetts
02108, Attention: Investor Services, or by telephone at 1-800-25-KRUPP or
facsimile at 617-423-8919. Unitholders should also use this fax number for
delivery of their completed proxy cards. In addition to soliciting proxies by
mail, proxies may be solicited in person and by telephone or telegraph.
Unitholders may also contact their broker, dealer, commercial bank, trust
company or other nominee for assistance concerning the proxy solicitation.
VOTES REQUIRED
Under the terms of the partnership agreement, the vote of the unitholders
owning a majority of the units is necessary to approve the amendment to the
partnership agreement. Under Massachusetts law, the vote of the unitholders
owning a majority of the units is necessary to approve the merger. Each unit
entitles the holder thereof to one vote on each matter submitted to a vote of
the unitholders. If a majority in interest of the unitholders consent to the
merger and the amendment and certain other conditions are met, the merger will
be completed. If both the merger and the amendment are not approved by the
unitholders owning a majority of the units, the merger will not be completed.
The purchaser owns approximately 45.9% of the outstanding units, while
Equity Resources, which holds approximately 6.1% of the partnership's
outstanding units, has agreed to vote for the approval of the merger and the
amendment to the partnership's partnership agreement. Moreover, because one of
the general partners has entered into agreements with the holders of
approximately 1,265 units which would require them to vote their units in
proportion to the votes of all other unitholders who vote on a matter, the
purchaser together with Equity Resources has voting power over approximately
54.6% of the outstanding units. Units held by Krupp LP, as a limited partner of
the partnership, will not be voted at the special meeting or included in the
determination of whether a quorum exists.
The consent of the unitholders holding a majority in interest of the
outstanding units is necessary to complete the proposed merger and to adopt the
amendment. Failure to return a proxy in a timely manner or to vote at the
special meeting, abstention from voting or a broker non-vote will each have the
same effect as a vote "against" the merger and "against" the amendment.
Therefore, unitholders are asked to please date, sign and promptly return their
proxy cards.
SOLICITATION PROCEDURES
The Partnership has retained Krupp Funds Group to act as solicitation agent
and for advisory services in connection with this proxy statement. In connection
therewith, Krupp Funds Group will be paid reasonable and customary compensation
and will be reimbursed for their reasonable out-of-pocket expenses, as described
above under "Special Factors--Financing of the Merger--Costs Associated with the
Merger." The partnership has also agreed to indemnify Krupp Funds Group against
specified liabilities and expenses including liabilities and expenses under
federal securities laws.
The partnership will not pay any fees or commissions to any broker or dealer
or other person, other than to Krupp Funds Group, for soliciting proxies in this
solicitation. Banks, brokerage houses and other custodians, nominees and
fiduciaries will be requested to forward the solicitation materials to the
customers for whom they hold units, and the partnership will reimburse them for
reasonable mailing and handling expenses incurred by them in forwarding proxy
materials to their customers.
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REVOCATION OF PROXIES
A proxy executed and delivered by a unitholder may subsequently be revoked
by submitting written notice of revocation to the partnership. A revocation may
be in any written form, including a later-dated proxy card, validly signed by a
unitholder as long as it clearly states that the unitholder's proxy previously
given is no longer effective. To prevent confusion, the notice of revocation
must be dated. Notices of revocation should be delivered to Krupp Funds Group at
the address or by facsimile as listed above. A unitholder may also revoke its
proxy by attending the special meeting and voting in person. If a unitholder
signs, dates and delivers a proxy to the partnership and, thereafter, on one or
more occasions, signs and delivers a later-dated proxy, the latest-dated proxy
card is controlling as to the instructions indicated in that proxy and
supersedes the unitholder's prior proxy as embodied in any previously submitted
proxy card.
APPRAISAL RIGHTS
Neither the partnership agreement nor Massachusetts law provides rights of
appraisal or similar rights to unitholders whether or not unitholders abstain or
vote for or against the merger. As a result, if unitholders holding a majority
of the units approve the merger and if the merger is completed, the partnership
will be merged with and into the purchaser and all unaffiliated unitholders,
including those who do not approve the merger, will receive the $600 per unit
merger price for each of their units in accordance with the terms of the merger
agreement.
THE MERGER AGREEMENT
The merger agreement between the partnership and the purchaser will be
entered into only if the unitholders approve the amendment to the partnership's
partnership agreement. Under the merger agreement, the merger of the partnership
with and into the purchaser will not take place unless the unitholders approve
the merger. If the merger is approved at the special meeting, the general
partners on behalf of the partnership intend to enter into an agreement
substantially in the form of the merger agreement. The material provisions of
the merger agreement are summarized below. Although complete in all material
respects, this summary is qualified by reference to the full text of the merger
agreement attached to this proxy statement as Annex A. Unitholders are
encouraged to read the merger agreement carefully. If all of the conditions in
the merger agreement are met, principally the approval by the unitholders of the
merger, at the effective time of the merger, the partnership will be merged with
and into the purchaser, with the purchaser continuing as the surviving entity.
The purchaser, as the surviving entity, will succeed to and possess all of the
rights, privileges and powers of the partnership, whose assets shall vest in the
purchaser, and who will then be liable for all of the liabilities and
obligations of or any claims or judgments against the partnership.
CLOSING DATE; EFFECTIVE TIME OF THE MERGER
The merger will become effective at 5:00 p.m. on the date on which the
latter of (1) the filing of the certificate of merger with the Office of the
Secretary of State of Delaware and (2) the filing of the certificate of merger
with the Secretary of State of the Commonwealth of Massachusetts.
EFFECTS OF THE MERGER
At the effective time, by virtue of the merger, and without any further
action on the part of anyone, all partnership interest outstanding immediately
beforehand, including units, general partnership interests and original limited
partnership interests, will be cancelled. Each unit owned by the unitholders,
other than Equity Resources, or those who are not affiliates of the purchaser or
the general partners, will be automatically converted into a right to receive,
in exchange for each unit, $600
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in cash, without interest. Immediately before the effective time, 1,524
partnership interests (whether general or limited) will be contributed to the
purchaser for membership interests in the purchaser.
PAYMENT
The merger price will be paid to unaffiliated unitholders by the purchaser
within 15 days after the effective time. Interest will not accrue on amounts
owed to unaffiliated unitholders. Payments will be made only to the unaffiliated
unitholder in whose name units are registered on the books of the partnership at
the effective time. Neither the purchaser nor any other party will be liable to
any unitholder for any merger consideration or other payments made to a public
official under applicable abandoned property laws. The purchaser will be
entitled to deduct and withhold from the merger consideration paid to a
unitholder any taxes or other amounts required by law, including backup
withholding imposed under Internal Revenue Code Section 3406 and withholding
imposed under Internal Revenue Code Section 1445 on the gross amount realized by
specified foreign persons upon the disposition of specified interests in U.S.
real property.
Under federal law, to the extent that amounts are withheld, these amounts
will be treated as having been paid to a unitholder for purposes of the merger
agreement. Beginning at the effective time, there will be no further transfers
of any units on the books of the partnership. Each unitholder whose units were
converted and cancelled will be deemed to have withdrawn as a limited partner of
the partnership. Unitholders will then have no further interest in the
partnership or the purchaser, including any allocations or distributions of
income, property or otherwise, other than the right to receive the merger price
per unit.
Following the effective time, the officers of the purchaser, as the
surviving entity in the merger, will terminate the partnership's reporting
obligations with the Securities and Exchange Commission.
AUTHORITY AND CONSENT OF THE PURCHASER
The purchaser has informed the partnership that the execution, delivery and
performance of the merger agreement by the purchaser and the completion of the
transactions contemplated by it have been duly authorized by the purchaser's
members as necessary.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
The merger agreement contains no representations and warranties.
CONDITIONS TO THE MERGER
Before the merger is completed, the following must occur:
- the holders of a majority of the outstanding units must approve the
amendment in accordance with the partnership agreement;
- the holders of a majority of the outstanding units must approve the merger
agreement in accordance with the partnership agreement and Massachusetts
law; and
- any consent, approval or waiver of any third party required in order for
the purchaser or the partnership to complete the merger must be obtained.
In addition, unless the relevant condition is waived by the purchaser and
the partnership, the merger will not be completed if any of the following occur:
- the enactment, promulgation or enforcement by any governmental entity of a
statute, regulation or injunction which prohibits or restrains the merger
or subjects any party to substantial damage as a result of the merger; and
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- a change or event which has or could be reasonably expected to either
(a) cause a material adverse effect to the business, condition, financial
or otherwise, or result of operations of the partnership or (b) prevent or
cause a material delay in the completion of the merger or the performance
of the merger agreement by the purchaser or the partnership.
TERMINATION
The merger agreement may be terminated by the mutual agreement of the
purchaser and the general partners at any time before the filing of the
certificates of merger.
AMENDMENT
At any time before the filing of the certificates of merger, the merger
agreement may be amended by the joint determination in writing of the purchaser
and the general partners. No amendment may be made which would change any term
of the certificate of formation or operating agreement of the surviving entity
in the merger.
WAIVER
At any time before the effective time of the merger, whether before or after
this proxy statement is mailed, any party may waive compliance with any of the
agreements of the other party or conditions to its own obligations contained in
the merger agreement.
THE SURVIVING ENTITY
The certificate of formation, operating agreement and managers and officers
of the purchaser will be the certificate of formation, operating agreement and
managers and officers utilized by or employed by the purchaser before the
merger.
RELATED AGREEMENTS
In connection with the merger, the purchaser and its sole member, KRF
Company, have entered into an investment agreement and voting agreement, each
dated as of January 6, 2000, with the investment funds affiliated with Equity
Resources. Under the investment agreement, Equity Resources has agreed to
reinvest their units in the purchaser as a capital contribution. KRF Company, on
the other hand, has previously contributed 10,826 units as a capital
contribution and will make a cash contribution to the purchaser of up to $1.0
million. The purchaser and KRF Company, on the one hand, and Equity Resources,
on the other hand, further agreed to indemnify the other in connection with any
liability arising out of a breach of the investment agreement, while the
purchaser agreed to indemnify the parties in connection with any liabilities
arising out of any unitholder litigation relating to the merger. To the extent
that the indemnification provisions are unenforceable, the parties agreed to
contribute additional amounts in satisfaction of any losses to the extent
legally permissible.
The purchaser may terminate the investment agreement at any time. The
investment agreement will terminate automatically if the merger is not completed
by August 1, 2000, or, if the members of the purchaser do not make their capital
contributions before the parties complete the merger.
Under the voting agreement, Equity Resources, which owns approximately 6.1%
of the outstanding units, has agreed that at any meeting of the partners of the
partnership, however called, and in any action by consent of the limited
partners of the partnership, Equity Resources will vote, or cause to be voted,
the units held of record or beneficially owned by it in favor of the merger and
the amendment to the partnership agreement. Equity Resources further agreed that
at any meeting of the partners of the partnership, however called, and in any
action by consent of the limited partners of the partnership, Equity Resources
will vote, or cause to be voted, in person or by proxy, the units held of record
or beneficially owned by it against approval of any proposal made in opposition
to or in competition with the merger.
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In addition, Equity Resources further agreed that, without the consent of
the purchaser and KRF Company, Equity Resources would not, either directly or
indirectly, offer or otherwise agree to sell, assign, pledge, transfer, exchange
or dispose of any units or options, warrants or other convertible securities to
acquire or purchase units, whether now or later acquired. Under the terms of the
voting agreement, if Equity Resources acquires any additional units, the voting
agreement will be applicable to the additional units.
In addition, under the terms of the purchaser's organizational documents,
upon the request of Equity Resources, the managing members of the purchaser have
agreed to cause the purchaser to attempt to sell the partnership's properties at
any time during the six-month period following the fifth anniversary of the
completion of the merger.
THE AMENDMENT TO THE PARTNERSHIP AGREEMENT
PURPOSE
The purpose of the amendment is to amend the partnership's partnership
agreement to permit the partnership to enter into the merger agreement and
complete the merger with the purchaser. Except for specifically enumerated
transactions, the partnership agreement prohibits the partnership from selling
any property to, or entering into any agreement or arrangement with, a general
partner or an affiliate of a general partner. Because the purchaser is an
affiliate of the general partners and the merger agreement is an agreement which
may be considered to be an indirect sale of the partnership's properties, these
prohibitions prevent the partnership from entering into the merger agreement
with the purchaser.
THE AMENDMENT
The description of the amendment to the partnership agreement summarized
above is qualified in its entirety by reference to the text of the amendment
attached to this proxy statement as Appendix B. Unitholders are encouraged to
read the annexed amendment carefully.
In accordance with the amendment, the parties must enter into the merger
agreement after February 1, 2000 and before August 1, 2000. The amendment adds
the merger agreement to the list of the transactions which the partnership is
permitted to complete with an affiliate of the general partners; otherwise, the
amendment does not alter the partnership agreement.
INFORMATION ABOUT THE PARTNERSHIP,
ITS GENERAL PARTNERS AND THEIR AFFILIATES
THE PARTNERSHIP
The partnership was organized on April 3, 1982 as a limited partnership
under Massachusetts law. The partnership is governed by its partnership
agreement, which vests exclusive management and control over the partnership in
the general partners, subject to the rights of the unitholders to vote on
limited matters. The address of the partnership's principal executive office is
at One Beacon Street, Suite 1500, Boston, Massachusetts 02108, and the telephone
number is (617) 523-7722.
The primary business of the partnership is to acquire, operate and
ultimately dispose of its properties. The partnership issued all of its general
partner interests to its two general partners, Krupp Corp and Krupp LP. The
partnership also issued its original limited partner interests to Krupp LP. On
June 4, 1982, the partnership commenced an offering of up to 25,000 units at the
price of $1,000 per unit. As of September 29, 1982, the partnership received
subscriptions for all 25,000 units and, therefore, the public offering was
successfully completed on that date.
THE GENERAL PARTNERS
The principal business address of each of the general partners is at One
Beacon Street, Suite 1500, Boston, Massachusetts 02108. The principal business
of each of the general partners is to act as a
22
<PAGE>
general partner of the partnership. The directors and principal executive
officers of Krupp Corp are Douglas Krupp, George Krupp and David Quade, and the
sole shareholders of Krupp Corp are Douglas Krupp and George Krupp. The general
partners of Krupp LP are Douglas Krupp, George Krupp and Krupp Corp. Krupp LP
owns all of the original limited partnership interests in the partnership.
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive
Officer of The Berkshire Companies Limited Partnership, an integrated real
estate financial services firm engaged in real estate acquisitions, mortgage
banking, investment sponsorship, venture capital investing, financial
management, commercial laundry and linen services, and furniture manufacturing
and sales.
Mr. Krupp has held the position of Co-Chairman since The Berkshire Companies
was established as The Krupp Companies in 1969 and he has served as the Chief
Executive Officer since 1992. Mr. Krupp serves as a Director of Krupp Government
Income Trust and Krupp Government Income Trust-II and he is also a member of the
Board of Trustees at Brigham & Women's Hospital. He is a graduate of Bryant
College where he received an honorary Doctor of Science in Business
Administration in 1989 and was elected trustee in 1990. Mr. Krupp's address is
at One Beacon Street, Suite 1500, Boston, Massachusetts 02108.
George Krupp is actively involved in the management of The Berkshire
Companies and affiliated entities. 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. Mr. Krupp's address is
at One Beacon Street, Suite 1500, Boston, Massachusetts 02108.
David Quade is Executive Vice President and Chief Financial Officer of The
Berkshire Group. Prior to joining The Berkshire Group, Mr. Quade was a principal
and Chief Financial Officer for eighteen years at Leggat McCall Properties. He
received a P.A.P. from Northwestern University Graduate Business School and an
M.B.A. and a B.S. from Central Michigan University.
DESCRIPTION OF THE ASSETS
GENERAL
The partnership currently indirectly owns three multi-family apartment
complexes--the Brookeville apartments, the Dorsey's Forge apartments and the
Hannibal Grove apartments having an aggregate of 990 units. The partnership
considers itself to be engaged only in the industry segment of investment in
real estate. The partnership's real estate investments are subject to seasonal
fluctuations due to changes in utility consumption and seasonal maintenance
expenditures. However, the future performance of the partnership will depend
upon factors that cannot be predicted. A summary of the partnership's real
estate investments is presented below.
<TABLE>
<CAPTION>
OCCUPANCY
-------------------------- AVERAGE OCCUPANCY FOR THE YEAR
OCCUPANCY AS OF ENDED DECEMBER 31,
YEAR TOTAL SEPTEMBER 30, ----------------------------------------------------
ACQUIRED UNITS 1999 1998 1997 1996 1995 1994
-------- -------- --------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brookeville apartments;
Columbus, Ohio..................... 1983 424 97% 99% 98% 95% 94% 94%
Hannibal Grove apartments;
Columbia, Maryland................. 1983 316 98% 100% 100% 94% 93% 94%
Dorsey's Forge apartments;
Columbia, Maryland................. 1983 250 98% 100% 99% 94% 94% 95%
</TABLE>
Mortgage notes payable collateralized by the partnership's properties
consisted of the following as at September 30, 1999 and December 31, 1998.
23
<PAGE>
MORTGAGE NOTES
<TABLE>
<CAPTION>
PRINCIPAL
SEPTEMBER 30, ------------------------- INTEREST MATURITY
PROPERTY 1999 1998 1997 RATE DATE
- -------- ------------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Brookeville apartments.............. $ 8,371,635 $ 8,428,579 $ 8,499,549 7.75 1-Aug-28
Dorsey's Forge apartments........... $ 4,250,379 $ 4,363,601 $ 4,502,891 9.25 3-May-00
Hannibal Grove apartments........... $ 5,780,516 $ 5,934,497 $ 6,123,931 9.25 3-May-00
----------- ----------- -----------
Total............................. $18,402,530 $18,726,677 $19,126,371
=========== =========== ===========
</TABLE>
BROOKEVILLE APARTMENTS
The property is subject to a non-recourse mortgage note in the original
amount of $8,755,000, payable to the Department of Housing and Urban
Development. The mortgage note requires monthly payments of $60,600 consisting
of principal and interest at the rate of 7.75% per annum. In addition, the
partnership is required to fund a monthly deposit of $5,158 to an escrow account
to be used for future property replacements and improvements and a mortgage
insurance premium deposit equal to 0.5% per annum of the outstanding principal
balance. The note matures on August 1, 2028. In accordance with HUD regulations,
distributions are limited to the extent of surplus cash, as defined by the
Regulatory Agreement for Multifamily Housing Projects, dated July 20, 1993
between Brookeville Apartments Limited Partnership and the Secretary of Housing
and Urban Development as recorded in the Franklin County Recorder Volume 23319,
page J05. The mortgage note payable is collateralized by the property and may be
prepaid during the five years beginning August 1, 1998, subject to an annual
declining prepayment penalty of 5% to 1%, respectively. After August 1, 2003,
there is no prepayment penalty.
Based on the borrowing rates currently available to the partnership for bank
loans with similar terms and average maturities, the fair value of long-term
debt was approximately $9,446,000 at December 31, 1998.
HANNIBAL GROVE AND DORSEY'S FORGE APARTMENTS
The properties are subject to non-recourse mortgage notes for the Hannibal
Grove apartments and Dorsey's Forge apartments in the original amounts of
$6,800,000 and $5,000,000, respectively, payable at a rate of 9.25% per annum.
Monthly principal and interest payments are $62,333 for Hannibal Grove
apartments and $45,833 for the Dorsey's Forge apartments. The notes mature on
May 3, 2000 at which time all unpaid principal, $5,653,175, in the case of the
Hannibal Grove apartments, and $4,156,746, in the case of the Dorsey's Forge
apartments, and any accrued interest are due. The mortgage notes payable are
collateralized by the respective properties and may be prepaid.
Based on the borrowing rates currently available to the partnership for bank
loans with similar terms and average maturities, the fair value of long-term
debt for Hannibal Grove apartments and Dorsey's Forge apartments, the fair
market value was approximately $6,118,000 and $4,449,000, respectively, at
December 31, 1998.
Due to restrictions on transfers and prepayment consisting primarily of
prepayment penalties, the partnership may be unable to refinance certain
mortgage notes payable at such calculated fair value. The aggregate scheduled
principal amounts of long-term borrowings due during the five years ending
December 31, 2003 are $437,124, $10,020,473, $89,480, $96,667 and $104,430.
During 1998, 1997 and 1996 the partnership paid $1,625,506, $1,659,719 and
$1,690,992 of interest, respectively, on its mortgage notes.
24
<PAGE>
The partnership is implementing its capital improvements plan in light of
the competition in the markets served by the partnership. See "Special
Factors--Alternatives to the Merger--Continuation of the Partnership."
DISTRIBUTIONS
The table below sets forth the distribution made by the partnership to its
partners for the nine months ended September 30, 1999 and during the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------
SEPTEMBER 30, 1999 1998 1997
------------------- ------------------- -------------------
AMOUNT PER UNIT AMOUNT PER UNIT AMOUNT PER UNIT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Limited Partners:
Investor Limited Partners
(25,000 Units outstanding)....... $793,043 $31.72 $594,752 $23.79 $396,500 $15.86
Original Limited Partner........... 33,391 25,045 16,697
General Partner.................... 8,348 6,261 4,174
-------- -------- --------
Total............................ $834,782 $626,058 $417,371
======== ======== ========
</TABLE>
Future distributions will be at the discretion of the partnership and will
be determined after consideration of a number of factors including, among
others, the partnership's financial condition, cash flows and current and
anticipated cash needs.
OWNERSHIP OF UNITS
The number of unitholders as of September 30, 1999 was approximately 588. As
of March 1, 2000, the purchaser owned 11,991.5 units, or 47.9% of the
outstanding units.
The Krupp Family Limited Partnership-94, KRF Company, the purchaser and the
general partners are under the common control of Douglas and George Krupp. As a
result of the voting and investment agreements entered into among Equity
Resources, the purchaser, the Krupp Family Limited Partnership, KRF Company,
Douglas Krupp and George Krupp may also be deemed to each beneficially own
indirectly 1,524 units, which is approximately 6.1% of the total number of
units.
25
<PAGE>
The table below sets forth the beneficial ownership interests in the units
held by the investment entities comprising the Equity Resources funds.
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNER CLASS
- -------------- ------------------------------------ ------------------- --------
<S> <C> <C> <C>
Investor Limited Partner Units Equity Resource Fund XIX L.P. 413.00 Units 1.65%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resources Bridge Fund 30.00 Units 0.12%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource General Fund L.P. 40.00 Units 0.16%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Fund XVI L.P. 916.00 Units 3.66%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Brattle Fund 30.00 Units 0.12%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Cambridge Fund 95.00 Units 0.38%
14 Story Street
Cambridge, MA 02138
TOTAL 1,524.00 Units 6.10%
</TABLE>
MARKET FOR THE UNITS
The units are not traded on any established trading market and no market of
this type is expected to develop. Thus, limited information is available as to
high and low bid quotations or sales prices. In a tender offer completed in June
1999, the purchaser acquired approximately 41.2% of the outstanding units at
$550 per unit, while in April 1999 a third party had offered $425 per unit. In
December 1999, the purchaser acquired 472 units from Smithtown Bay L.L.C. at the
$550 per unit price and, in January 2000, it acquired 649.2 units from Krescent
Partners L.L.C. at $600 per unit. Smithtown Bay is entitled to receive an
additional $50 per unit for the units it previously sold to the purchaser (the
difference between the $600 per unit merger price and the $550 per unit price
Smithtown Bay received for its units). Finally, in February 2000, the purchaser
acquired an additional 496.3 units and 20 units, respectively, at $600 per unit
from American Realty Holdings I, L.P. and Longacre Corporation.
According to The Partnership Spectrum, an independent third-party industry
publication, for the period between October 1, 1999 and November 30, 1999, a
total of ten units traded at $450 per unit. Unitholders are advised that the
gross sales prices reported by The Partnership Spectrum do not necessarily
reflect the net sales proceeds received by sellers of units, which typically are
reduced by commissions and other secondary market transaction costs to amounts
less than the reported prices. In addition, other measures of the value of the
units may be relevant to unitholders.
26
<PAGE>
RELATED PARTY TRANSACTIONS
Pursuant to the partnership's partnership agreement, the general partners
are entitled to cash distributions in respect of their interests in the
partnership. The general partners have received aggregate cash distributions in
respect of these interests of $4,174, $4,174 and $6,261 for the years ended
December 31, 1996, 1997 and 1998, respectively, and $8,348 for the nine months
ended September 30, 1999.
Pursuant to certain management agreements, the managing agent of the
partnership's properties, an affiliate of the general partners, receives
property management fees in return for its management of the properties. The
management agreements provide for the payment of monthly management fees payable
at the rate of up to 5% of rents and other income actually received by the
partnership. In addition, although the general partners and their affiliates do
not receive any fees from the partnership for the partnership administration
services provided to the partnership, the managing agent and other affiliates of
the general partners are reimbursed by the partnership for expenses incurred in
connection with the provision of services including accounting, computer,
insurance, travel, payroll, and legal services and the preparation and mailing
of reports and other communication to unitholders. For the three years ended
December 31, 1996, 1997 and 1998, and for the three months ended September 30,
1999, the partnership paid such affiliate property management fees and
reimbursement of expenses aggregating $499,495, $536,798, $540,461 and $414,678,
respectively.
SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
partnership's results of operations and financial position. This information
should be read in conjunction with the Consolidated Financial Statements and
Notes to those statements and other financial information included or
incorporated by reference in this document. The historical financial data as of
and for the quarters ended September 30, 1999 and 1998 have been derived from
the unaudited financial statements included in the partnership's Quarterly
Report on Form 10-Q for the quarters ended September 30, 1999 and 1998,
respectively. The historical financial data for the years ended December 31,
1998, 1997 , 1996, 1995 and 1994 have been derived from audited financial states
included in the partnership's Annual Report on Form 10-K for the year ended
December 31, 1998. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
SEPTEMBER 30 YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues................ $ 5,872,518 $ 5,674,940 $ 7,608,315 $ 7,280,181 $ 6,628,658 $ 6,352,337 $ 6,215,466
Net income (loss)............. 439,247 432,967 536,483 (23,224) (446,360) (547,893) (453,031)
Net income (loss) allocated
to:
Investor Limited Partners..... 417,285 411,318 509,659 (22,063) (424,042) (520,498) (430,380)
Per Unit.................... 16.69 16.45 20.39 (0.88) (16.96) (20.82) (17.22)
Original Limited Partner.... 17,570 17,319 21,459 (929) 0 0 (18,121)
Net income (loss) allocated
to:
General partners............ 4,392 4,330 5,365 (232) (22,318) (27,395) (4,530)
Total assets.................. 11,148,667 11,789,516 11,982,905 12,354,768 13,224,310 14,384,144 15,702,150
Long-term obligations......... 8,259,781 18,405,225 18,289,553 18,726,677 19,126,371 19,491,853 19,827,968
DISTRIBUTIONS:
Investor Limited Partners..... $ 793,043 $ 594,752 $ 594,752 $ 396,500 $ 396,500 $ 297,495 $ 99,132
Per Unit...................... 31.72 23.79 23.79 15.86 15.86 11.90 3.97
Original Limited Partner...... 33,391 25,045 25,045 16,697 16,697 12,526 4,174
General partners.............. 8,348 6,261 6,261 4,174 4,174 3,132 1,043
</TABLE>
The historical performance of the partnership is not necessarily indicative
of its future operations.
27
<PAGE>
INFORMATION CONCERNING THE PURCHASER
AND ITS AFFILIATES
THE PURCHASER
The purchaser, KRF3 Acquisition Company, L.L.C., is a wholly owned
subsidiary of KRF Company whose principal business is to hold limited
partnership interests in Krupp Realty Fund, Ltd.-III. The purchaser was
initially organized for the purpose of effecting a tender offer for the units of
the partnership. In June 1999, the purchaser completed its tender offer and
purchased units representing approximately 41.2% of the outstanding units. Since
that time, the purchaser has not carried on any activities to date other than
those incident to its formation and the transactions contemplated by the merger
agreement. The purchaser has no assets and liabilities. The principal office and
place of business of the purchaser is One Beacon Street, Suite 1500, Boston,
Massachusetts 02108.
AFFILIATES OF THE PURCHASER
KRF Company was organized to conduct the business and the operations of the
purchaser. The principal office and place of business of KRF Company is One
Beacon Street, Suite 1500, Boston, Massachusetts 02108. The sole member of KRF
Company is The Krupp Family Limited Partnership-94.
The Krupp Family Limited Partnership was formed to hold and manage
investments for its partners. The general partners of The Krupp Family Limited
Partnership are Douglas Krupp and George Krupp. See "Information About The
Partnership, Its General Partners and Their Affiliates--The General Partners."
The Krupp Family Limited Partnership, KRF Company, the purchaser and the
general partners are under the common control of Douglas Krupp and George Krupp.
As a result of the voting and investment agreements entered into among Equity
Resources, the purchaser, KRF Company, The Krupp Family Limited Partnership,
Douglas Krupp and George Krupp may be deemed to each beneficially own indirectly
1,524 units, which is 6.1% of the total number of units.
All information contained in this proxy statement concerning the purchaser
is based upon statements and representations made by the purchaser or its
representatives to the partnership or its representatives.
WHERE YOU CAN FIND MORE INFORMATION
GENERAL
The partnership files reports with the Securities and Exchange Commission on
a regular basis. Unitholders may read or copy any document that the partnership
files with the Commission at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Unitholders may obtain information about
the Public Reference Room by calling the Commission for further information at
1-800-SEC-0330. The partnership's Commission filings are also available from the
Commission's web site at www.sec.gov.
The following documents previously filed by the partnership with the
Securities and Exchange Commission are incorporated in this proxy statement by
reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1998 as filed
on March 31, 1999; and
(b) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
as filed on November 15, 1999.
All documents filed by the partnership pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this document and
before the date of the special meeting or
28
<PAGE>
any adjournment or postponement of the meeting will be deemed to be incorporated
by reference and made a part of this document from the date of the filing of
these documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this document will be deemed to be modified or
superseded for purposes of this proxy statement to the extent that a statement
contained in this document or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference in this document
modified or supersedes the statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part of
this proxy statement.
The purchaser, KRF Company, The Krupp Family Limited Partnership, the
general partners, Douglas Krupp and George Krupp are affiliates of the
partnership. Accordingly, together with the partnership, they have jointly filed
with the Commission a Schedule 13E-3. This proxy statement does not contain all
of the information contained in the Schedule 13E-3, some of which is omitted as
permitted by Commission rules. Statements made in this proxy statement, while
complete in all material respects, are qualified by reference to documents filed
as exhibits to the Schedule 13E-3. The Schedule 13E-3, including exhibits, is
available for inspection and copying at the Commission as described above.
The purchaser and the general partners are not public companies and are not
required to file reports of any type with the Commission.
INDEPENDENT ACCOUNTS
The consolidated financial statements and financial statement schedule of
the partnership appearing in this proxy statement have been audited by
PricewaterhouseCoopers LLP, independent auditors, as set forth in their report
included in this document. These consolidated financial statements and financial
statement schedule are included in this document and incorporated in this
document by reference. It is expected that representatives of
PricewaterhouseCoopers LLP will be present at the special meeting, both to
respond to appropriate questions of unitholders and to make a statement if they
so desire.
29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets for December 31, 1998 and
December 31, 1997......................................... F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1998, 1997
and 1996.................................................. F-4
Consolidated Statements of Changes in Partners' Deficit For
the Years Ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7-F-13
Schedule III--Real Estate and Accumulated Depreciation...... F-14
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Krupp Realty Fund, Ltd.-III and Subsidiary:
In our opinion, the consolidated financial statements and the financial
statement schedule listed in the index on page F-1 present fairly, in all
material respects, the financial position of Krupp Realty Fund, Ltd.-III and its
Subsidiary (the "Partnership") at December 31, 1998 and December 31, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial statement
schedule are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 1999
F-2
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Multi-family apartment complexes, net of accumulated
depreciation
of $21,977,268 and $20,216,642, respectively (Note D)..... $ 9,784,836 $10,519,769
Cash and cash equivalents (Note C).......................... 932,065 552,221
Replacement reserve escrow (Note D)......................... 160,954 177,778
Cash restricted for tenant security deposits................ 229,416 202,691
Prepaid expenses and other assets........................... 614,911 595,696
Deferred expenses, net of accumulated amortization of
$258,861 and $212,971, respectively....................... 260,723 306,613
----------- -----------
Total assets............................................ $11,982,905 $12,354,768
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage notes payable (Note D)........................... $18,726,677 $19,126,371
Accrued expenses and other liabilities (Note E)........... 601,319 683,413
Due to affiliates (Note G)................................ 199,500 --
----------- -----------
Total liabilities....................................... 19,527,496 19,809,784
=========== ===========
Commitment (Note F)
Partners' deficit (Note F):
Investor Limited Partners (25,000 Units outstanding)...... (6,305,460) (6,220,367)
Original Limited Partner.................................. (909,737) (906,151)
General Partners.......................................... (329,394) (328,498)
----------- -----------
Total Partners' deficit................................. (7,544,591) (7,455,016)
----------- -----------
Total liabilities and Partners' deficit................. $11,982,905 $12,354,768
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rental................................................. $7,541,280 $7,224,085 $6,568,309
Other income........................................... 67,035 56,096 60,349
---------- ---------- ----------
Total revenue........................................ 7,608,315 7,280,181 6,628,658
---------- ---------- ----------
Expenses:
Operating (Note G)..................................... 2,004,219 2,041,820 1,991,923
Maintenance............................................ 591,235 578,869 556,909
Real estate taxes...................................... 559,440 539,978 504,867
General and administrative (Note G).................... 66,012 101,687 93,995
Management fees (Note G)............................... 376,570 357,766 326,363
Depreciation and amortization.......................... 1,806,516 1,980,892 1,866,979
Interest (Note D)...................................... 1,667,840 1,702,393 1,733,982
---------- ---------- ----------
Total expenses....................................... 7,071,832 7,303,405 7,075,018
---------- ---------- ----------
Net income (loss) (Note H)............................... $ 536,483 $ (23,224) $ (446,360)
========== ========== ==========
Allocation of net income (loss)
(Note F):
Investor Limited Partners (25,000 Units outstanding)... $ 509,659 $ (22,063) $ (424,042)
========== ========== ==========
Investor Limited Partners
Per Unit............................................. $ 20.39 $ (.88) $ (16.96)
========== ========== ==========
Original Limited Partner............................... $ 21,459 $ (929) $ --
========== ========== ==========
General Partners....................................... $ 5,365 $ (232) $ (22,318)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
INVESTOR ORIGINAL TOTAL
LIMITED LIMITED GENERAL PARTNERS'
PARTNERS PARTNER PARTNERS DEFICIT
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Balance at
December 31, 1995........................... $(4,981,262) $(871,828) $(297,600) $(6,150,690)
Net loss...................................... (424,042) -- (22,318) (446,360)
Distributions................................. (396,500) (16,697) (4,174) (417,371)
----------- --------- --------- -----------
Balance at
December 31, 1996........................... (5,801,804) (888,525) (324,092) (7,014,421)
Net loss...................................... (22,063) (929) (232) (23,224)
Distributions................................. (396,500) (16,697) (4,174) (417,371)
----------- --------- --------- -----------
Balance at
December 31, 1997........................... (6,220,367) (906,151) (328,498) (7,455,016)
Net income (Note F)........................... 509,659 21,459 5,365 536,483
Distributions (Note F)........................ (594,752) (25,045) (6,261) (626,058)
----------- --------- --------- -----------
Balance at
December 31, 1998........................... $(6,305,460) $(909,737) $(329,394) $(7,544,591)
=========== ========= ========= ===========
</TABLE>
The per Unit distribution for the years ended December 31, 1998, 1997 and 1996
were $23.79, $15.86 and $15.86, respectively, none of which represented a return
of capital.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 536,483 $ (23,224) $(446,360)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 1,806,516 1,980,892 1,866,979
Interest earned on replacement reserve escrow............ (7,392) (4,889) --
Changes in assets and liabilities:
Decrease (increase) in cash restricted for tenant
security deposits...................................... (26,725) (18,933) 19,192
Decrease (increase) in prepaid expenses and other
assets................................................. (19,215) 7,394 (6,836)
Increase (decrease) in due to affiliates................. 199,500 -- (10,790)
Increase (decrease) in accrued expenses and other
liabilities............................................ (82,094) (54,465) 39,895
---------- ---------- ---------
Net cash provided by operating activities.............. 2,407,073 1,886,775 1,462,080
========== ========== =========
Cash flows from investing activities:
Additions to fixed assets................................ (1,025,693) (949,541) (996,817)
Increase (decrease) in accrued expenses and other
liabilities related to fixed asset additions........... -- (9,000) 9,000
Withdrawals from replacement reserve escrow 86,111 -- 153,250
Deposits to replacement reserve escrow................. (61,895) (61,895) (61,895)
---------- ---------- ---------
Net cash used in investing activities................ (1,001,477) (1,020,436) (896,462)
---------- ---------- ---------
Cash flows from financing activities:
Principal payments on mortgage notes payable............. (399,694) (365,482) (334,208)
Distributions............................................ (626,058) (417,371) (417,371)
---------- ---------- ---------
Net cash used in financing activities.................. (1,025,752) (782,853) (751,579)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents....... 379,844 83,486 (185,961)
Cash and cash equivalents, beginning of the year........... 552,221 468,735 654,696
---------- ---------- ---------
Cash and cash equivalents, end of the year................. $ 932,065 $ 552,221 $ 468,735
========== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION
Krupp Realty Fund, Ltd.-III ("KRF-III") was formed on April 23, 1982 by
filing a Certificate of Limited Partnership in The Commonwealth of
Massachusetts. KRF-III terminates on December 31, 2020, unless earlier
terminated upon the sale of the last of KRF-III's properties or the occurrence
of certain other events as set forth in the Partnership Agreement.
KRF-III issued all of the General Partner Interests to The Krupp Company, a
Massachusetts limited partnership, and The Krupp Corporation, a Massachusetts
corporation, in exchange for capital contributions aggregating $1,000. Except
under certain limited circumstances upon termination of KRF-III, the General
Partners are not required to make any additional capital contributions. KRF-III
also issued all of the Original Limited Partner Interests to The Krupp Company
in exchange for a capital contribution of $4,000. The Original Limited Partner
is not required to make any additional capital contributions to KRF-III.
On June 4, 1982, KRF-III commenced an offering of up to 25,000 units of
Investor Limited Partner Interests (the "Units") for $1,000 per Unit. As of
September 29, 1982, KRF-III received subscriptions for all 25,000 Units and
therefore, the public offering was successfully completed on that date.
In 1993, the General Partners formed Brookeville Apartments Limited
Partnership ("Brookeville L.P.") as a prerequisite for the refinancing of
Brookeville Apartments ("Brookeville") with the Department of Housing and Urban
Development ("HUD"). At the same time, the General Partners transferred
ownership of Brookeville to Brookeville L.P. The General Partner of Brookeville
L.P. is the Westcop Corporation ("Westcop") and KRF-III is the Limited Partner
in Brookeville L.P. Westcop has beneficially assigned its interest in
Brookeville L.P. to KRF-III. KRF-III and Brookeville L.P. are collectively known
as Krupp Realty Fund, Ltd.-III and Subsidiary (the "Partnership").
B. SIGNIFICANT ACCOUNTING POLICIES
The Partnership uses the following accounting policies for financial
reporting purposes, which may differ in certain respects from those used for
federal income tax purposes (see Note H).
BASIS OF PRESENTATION
The consolidated financial statements present the consolidated assets,
liabilities and operations of the Partnership. All intercompany balances and
transactions have been eliminated.
RISKS AND UNCERTAINTIES
The Partnership invests its cash primarily in deposits and money market
funds with commercial banks. The Partnership has not experienced any losses
to date on its invested cash. The preparation of financial statements in
conformity with generally accepted accounting principles 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 reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
cash investments are recorded at cost, which approximates current market values.
RENTAL REVENUES
Leases require the payment of rent monthly in advance. Rental revenues are
recorded on the accrual basis.
DEPRECIATION
Depreciation is provided for by the use of the straight-line method over
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5 to 25 years
Appliances, carpeting and equipment......................... 3 to 8 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
Real estate assets and equipment are stated at depreciated cost. Pursuant to
Statement of Financial Accounting Standards Opinion No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
impairment losses are recorded on long-lived assets used in operations on a
property by property basis, when events and circumstances indicate that the
assets might be impaired and the estimated undiscounted cash flows to be
generated by those assets are less than the carrying amount of those assets.
Upon determination that an impairment has occurred, those assets shall be
reduced to fair value.
DEFERRED EXPENSES
Costs of obtaining and recording mortgages are amortized over the life of
the related mortgage notes using the straight-line method which approximates the
effective interest method.
INCOME TAXES
The Partnership is not liable for federal or state income taxes as
Partnership income or loss is allocated to the Partners for income tax purposes.
In the event the Partnership's tax returns are examined by the Internal Revenue
Service or state taxing authority and the examination results in a change in
Partnership taxable income or loss, such change will be reported to the
Partners.
DESCRIPTIVE INFORMATION ABOUT REPORTABLE SEGMENTS
During the fourth quarter of 1998, the Partnership adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information
("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". Statement No. 131
establishes standards for the way that public business enterprises report
information regarding
F-8
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reportable operating segments. The adoption of Statement No. 131 did not affect
the results of operations or financial position of the Partnership.
The Partnership operates and develops apartment communities which generate
rental and other income through the leasing of apartment units. The General
Partners separately evaluate the performance of each of the Partnership's
apartment communities. However, because each of the apartment communities have
similar economic characteristics, facilities, services and tenants, the
apartment communities have been aggregated into a single dominant apartment
communities segment.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There are no tenants which contributed 10% or
more of the Partnership's total revenue during 1998, 1997 or 1996.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with current
year consolidated financial statement presentation.
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Cash and money market accounts.......................... $682,656 $402,783
Commercial paper........................................ 249,409 149,438
-------- --------
$932,065 $552,221
======== ========
</TABLE>
The properties owned by the Partnership are pledged as collateral for the
non-recourse mortgage notes outstanding at December 31, 1998 and 1997. Mortgage
notes payable consisted of the following:
<TABLE>
<CAPTION>
PRINCIPAL ANNUAL
------------------------- INTEREST
PROPERTY 1998 1997 RATE MATURITY DATE
- -------- ----------- ----------- -------- --------------
<S> <C> <C> <C> <C>
Brookeville Apartments...................... $ 8,428,579 $ 8,499,549 7.75% August 1, 2028
Dorsey's Forge Apartments
and Oakland Meadows Apartments............ 4,363,601 4,502,891 9.25% May 3, 2000
Hannibal Grove Apartments................... 5,934,497 6,123,931 9.25% May 3, 2000
----------- -----------
Total....................................... $18,726,677 $19,126,371
=========== ===========
</TABLE>
D. MORTGAGE NOTES PAYABLE
BROOKEVILLE APARTMENTS
The property is subject to a non-recourse mortgage note in the original
amount of $8,755,000, payable to the Department of Housing and Urban Development
("HUD"). The mortgage note requires monthly payments of $60,600 consisting of
principal and interest at the rate of 7.75% per annum. In
F-9
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. MORTGAGE NOTES PAYABLE (CONTINUED)
addition, the Partnership is required to fund a monthly deposit of $5,158 to an
escrow account to be used for future property replacements and improvements and
a mortgage insurance premium deposit equal to .5% per annum of the outstanding
principal balance. The note matures on August 1, 2028. In accordance with HUD
regulations, distributions are limited to the extent of Surplus Cash, as defined
by the Regulatory Agreement. The mortgage note payable is collateralized by the
property and may be prepaid during the five years beginning August 1, 1998,
subject to an annual declining prepayment penalty of 5% to 1%, respectively.
After August 1, 2003, there is no prepayment penalty.
Based on the borrowing rates currently available to the Partnership for bank
loans with similar terms and average maturities, the fair value of long-term
debt is approximately $9,446,000 at December 31, 1998. At December 31, 1997, the
fair market value could not be determined since the mortgage note could not be
prepaid.
HANNIBAL GROVE APARTMENTS ("HANNIBAL") AND DORSEY'S FORGE AND OAKLAND MEADOWS
APARTMENTS ("DORSEY'S")
The properties are subject to non-recourse mortgage notes for Hannibal and
Dorsey's in the original amounts of $6,800,000 and $5,000,000, respectively,
payable at a rate of 9.25% per annum. Monthly principal and interest payments
are $62,333 for Hannibal and $45,833 for Dorsey's. The notes mature on May 3,
2000 at which time all unpaid principal, $5,653,175 (Hannibal) and $4,156,746
(Dorsey's), and any accrued interest are due. The mortgage notes payable are
collateralized by the respective properties and may be prepaid subject to a
prepayment penalty. The prepayment penalty will be the greater of 1) the
principal balance multiplied by the difference between 9.4301% and the yield
rate on publicly traded U.S. Treasury Securities having the closest matching
maturity date as reported in the Wall Street Journal, or 2) one percent of the
then outstanding principal.
Based on the borrowing rates currently available to the Partnership for bank
loans with similar terms and average maturities, the fair value of long-term
debt for Hannibal and Dorsey's is approximately $6,118,000 and $4,449,000,
respectively at December 31, 1998. At December 31, 1997, the fair market value
could not be determined since the mortgage notes could not be prepaid.
Due to restrictions on transfers and prepayment, the Partnership may be
unable to refinance certain mortgage notes payable at such calculated fair
value.
The aggregate scheduled principal amounts of long-term borrowings due during
the five years ending December 31, 2003 are $437,124, $10,020,473, $89,480,
$96,667 and $104,430.
During 1998, 1997 and 1996 the Partnership paid $1,625,506, $1,659,719 and
$1,690,992 of interest, respectively, on its mortgage notes.
F-10
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Accounts payable........................................ $ 1,016 $ --
Accrued real estate taxes............................... 161,258 162,030
Other liabilities....................................... 191,934 288,703
Tenant security deposits................................ 219,272 186,065
Prepaid rent............................................ 27,839 46,615
-------- --------
$601,319 $683,413
======== ========
</TABLE>
F. PARTNERS' DEFICIT
Under the terms of the Partnership Agreement, profits and losses from
operations are allocated 95% to the Investor Limited Partners, 4% to the
Original Limited Partner and 1% to the General Partners until such time that the
Investor Limited Partners have received a return of their total invested capital
plus a 9% per annum Cumulative Return on Investment thereon and thereafter, 65%
to the Investor Limited Partners, 28% to the Original Limited Partner and 7% to
the General Partners.
Also, under the Partnership Agreement, cash distributions from operations
are generally made on the same basis as the allocations of profits and losses
described above. Net cash proceeds, as determined by the General Partners,
resulting from transactions such as refinancing or sale of a property, are to be
distributed as follows: 1) to the Investor Limited Partners until they have
received a return of their total Invested Capital; 2) to the Investor Limited
Partners until they have received an amount equal to their Cumulative Return on
Investment in respect of all fiscal years of the Partnership; 3) to the Original
Limited Partner and General Partners until they have received a return of their
total Invested Capital; 4) to an unaffiliated brokerage firm to the extent of
any subordinated Financial Consulting Fee then due, and; 5) any remaining Cash
Proceeds shall be distributed 65% to the Investor Limited Partners, 28% to the
Original Limited Partner and 7% to the General Partners. Notwithstanding
anything above, the General Partners shall, under all circumstances, receive at
least 1% of all distributions of net cash proceeds from a capital transaction.
Per the Partnership Agreement, profits from capital transactions are to be
allocated to the extent of cash distributions described above, first to the
Investor Limited Partners until they have received a return of their total
Invested Capital. Losses from capital transactions are to be allocated to the
extent of cash distributions described above, first to the Investor Limited
Partners until they have received a return of their total Invested Capital plus
their Cumulative Return on Investment. Thereafter, profits and losses from
capital transactions are to be allocated in accordance with the Partnership
Agreement. Notwithstanding anything above, the General Partners shall be
allocated, under all circumstances, at least 1% of all profits and losses from
capital transactions.
For income tax purposes, the allocation of Partnership items is determined
according to the Partnership Agreement, to the extent that each allocation has
"substantial economic effect" pursuant to the Internal Revenue Code, Section
704. In the event that an allocation does not meet these statutory requirements,
Partnership items will be reallocated according to these provisions. For 1996,
reallocation was necessary. The consolidated financial statements presented
herein reflect the allocation of net loss in accordance with the rules of the
Internal Revenue Code for the year ended December 31, 1996.
F-11
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. PARTNERS' DEFICIT (CONTINUED)
As of December 31, 1998, the following cumulative partner contributions and
allocations have been made since the inception of the Partnership:
<TABLE>
<CAPTION>
INVESTOR ORIGINAL
LIMITED LIMITED GENERAL
PARTNERS PARTNER PARTNERS TOTAL
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Capital contributions......................... $25,000,000 $ 4,000 $ 1,000 $25,005,000
Syndication costs............................. (3,486,600) -- -- (3,486,600)
Cash distributions from operations............ (10,706,873) (450,813) (112,701) (11,270,387)
Cash distributions from refinancing
proceeds.................................... (5,173,000) -- (52,252) (5,225,252)
Net loss from operations...................... (21,341,654) (858,825) (264,417) (22,464,896)
Net income from capital transaction........... 9,402,667 395,901 98,976 9,897,544
----------- --------- --------- -----------
Balance at December 31, 1998.................. $(6,305,460) $(909,737) $(329,394) $(7,544,591)
=========== ========= ========= ===========
</TABLE>
G. RELATED PARTY TRANSACTIONS
The Partnership pays property management fees to an affiliate of the General
Partners for management services. Pursuant to the management agreements,
management fees are payable monthly at a rate of 5% of the gross receipts from
the properties under management. The Partnership also reimburses affiliates of
the General Partners for certain expenses incurred in connection with the
operation of the Partnership and its properties, including administrative
expenses.
Amounts paid to the General Partners' affiliates during the years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Property management fees...................... $376,570 $357,766 $326,363
Expense reimbursements........................ 163,891 179,032 173,132
-------- -------- --------
Charged to operations......................... $540,461 $536,798 $499,495
======== ======== ========
</TABLE>
Due to affiliates consisted of expense reimbursements of $199,500 at
December 31, 1998.
H. FEDERAL INCOME TAXES
For federal income tax purposes, the Partnership is depreciating property
under the Accelerated Cost Recovery System ("ACRS") and the Modified Accelerated
Cost Recovery System ("MACRS"), depending on which is applicable.
F-12
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. FEDERAL INCOME TAXES (CONTINUED)
The reconciliation of the net income (loss) reported in the accompanying
Consolidated Statement of Operations with the net loss reported in the
Partnership's 1998, 1997 and 1996 federal income tax returns is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- ---------
<S> <C> <C> <C>
Net income (loss) per Consolidated
Statement of Operations..................... $ 536,483 $(23,224) $(446,360)
Difference in book to tax depreciation and
amortization.............................. 1,164,574 557,885 221,435
---------- -------- ---------
Net income (loss) for federal income tax
purposes.................................. $1,701,057 $534,661 $(224,925)
========== ======== =========
</TABLE>
The allocation of the net income for federal income tax purposes for the
year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
PORTFOLIO PASSIVE
INCOME INCOME TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Investor Limited Partners................... $63,141 $1,552,863 $1,616,004
Original Limited Partner.................... 2,658 65,384 68,042
General Partners............................ 665 16,346 17,011
------- ---------- ----------
$66,464 $1,634,593 $1,701,057
======= ========== ==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996 the per Unit net
income (loss) to the Investor Limited Partners for federal income tax purposes
was $64.64, $21.17 and $(8.55), respectively.
The basis of the Partnership's assets for financial reporting purposes
exceeds its tax basis by approximately $2,288,000 and $3,451,000 at
December 31, 1998 and 1997, respectively. The tax and book basis of the
Partnership's liabilities are the same.
F-13
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COSTS CAPITALIZED
INITIAL COSTS TO PARTNERSHIP SUBSEQUENT TO ACQUISITION
---------------------------- -----------------------------
BUILDINGS AND BUILDINGS AND DEPRECIABLE
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LIFE
- ----------- ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Brookeville Apartments
Columbus, OH................. $ 8,428,579 $ 623,126 $ 8,312,134 $ 4,158,128 3 to 25 years
Hannibal Grove Apartments
Columbia, MD................. 5,934,497 518,519 6,883,945 4,198,244 3 to 25 years
Dorsey's Forge & Oakland
Meadows Apartments
Columbia, MD................. 4,363,601 340,956 4,521,895 2,205,157 3 to 25 years
----------- ---------- ----------- -----------
Total...................... $18,726,677 $1,482,601 $19,717,974 $10,561,529
=========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNTS CARRIED AT
END OF YEAR
-------------------------- YEAR
BUILDINGS AND ACCUMULATED YEAR CONSTRUCTION
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED COMPLETED
- ----------- ---------- ------------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Brookeville Apartments
Columbus, OH.................. $ 623,126 $12,470,262 $13,093,388 $ 9,015,376 1983 1975
Hannibal Grove Apartments
Columbia, MD.................. 518,519 11,082,189 11,600,708 8,213,191 1983 1970
Dorsey's Forge & Oakland
Meadows Apartments
Columbia, MD.................. 340,956 6,727,052 7,068,008 4,748,701 1983 1970
---------- ----------- ----------- -----------
Total....................... $1,482,601 $30,279,503 $31,762,104 $21,977,268
========== =========== =========== ===========
</TABLE>
Reconciliation of Real Estate and Accumulated Depreciation for each of the
three years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
REAL ESTATE 1998 1997 1996
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year.......... $30,736,411 $29,786,870 $28,790,053
Acquisition and improvements.......... 1,025,693 949,541 996,817
----------- ----------- -----------
Balance at end of year................ $31,762,104 $30,736,411 $29,786,870
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION 1998 1997 1996
- ------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year.......... $20,216,642 $18,281,640 $16,460,550
Depreciation expense.................. 1,760,626 1,935,002 1,821,090
----------- ----------- -----------
Balance at end of year................ $21,977,268 $20,216,642 $18,281,640
=========== =========== ===========
</TABLE>
Note: The Partnership uses the cost basis for property valuation for both income
tax and financial statement purposes. The aggregate cost for federal income tax
purposes at December 31, 1998 is $31,775,676, and the aggregate accumulated
depreciation for federal income tax purposes is $24,267,669.
F-14
<PAGE>
INDEX TO CONSOLIDATED QUARTERLY (UNAUDITED) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets at September 30, 1999
(unaudited) and December 31, 1998......................... F-16
Consolidated Statements of Operations (unaudited) for the
three months ended
September 30, 1999 and September 30, 1998; and for the
nine months ended September 30, 1999 and September 30,
1998...................................................... F-17
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended
September 30, 1999 and September 30, 1998................. F-18
Notes to Consolidated Financial Statements (unaudited)...... F-19-F-20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. F-21-F-22
</TABLE>
F-15
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Multi-family apartment complexes, net of accumulated
depreciation
of $23,243,661 and $21,977,268, respectively.............. $ 9,277,242 $ 9,784,836
Cash and cash equivalents................................... 435,454 932,065
Replacement reserve escrow.................................. 211,780 160,954
Cash restricted for tenant security deposits................ 234,386 229,416
Prepaid expenses and other assets........................... 763,499 614,911
Deferred expenses, net of accumulated amortization of
$293,278 and $258,861, respectively....................... 226,306 260,723
----------- -----------
Total assets............................................ $11,148,667 $11,982,905
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage notes payable.................................... $18,402,530 $18,726,677
Accrued expenses and other liabilities.................... 686,263 601,319
Due to affiliates (Note 3)................................ -- 199,500
----------- -----------
Total liabilities....................................... 19,088,793 19,527,496
----------- -----------
Partners' deficit (Note 2):
Investor Limited Partners (25,000 Units outstanding)...... (6,681,218) (6,305,460)
Original Limited Partner.................................. (925,558) (909,737)
General Partners.......................................... (333,350) (329,394)
----------- -----------
Total Partners' deficit................................. (7,940,126) (7,544,591)
----------- -----------
Total liabilities and Partners' deficit................. 11,148,667 11,982,905
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rental...................................... $2,004,789 $1,878,976 $5,828,192 $5,625,386
Other income................................ 12,636 19,141 44,326 49,554
---------- ---------- ---------- ----------
Total revenue............................. 2,017,425 1,898,117 5,872,518 5,674,940
---------- ---------- ---------- ----------
Expenses:
Operating (Note 3).......................... 551,992 479,416 1,604,862 1,493,016
Maintenance................................. 165,240 178,257 475,110 415,508
Real estate taxes........................... 136,443 139,657 421,254 416,842
General and administrative (Note 3)......... 19,357 16,649 114,705 52,837
Management fees (Note 3).................... 97,416 94,529 289,737 281,469
Depreciation and amortization............... 444,333 507,842 1,300,811 1,327,983
Interest.................................... 406,315 415,868 1,226,792 1,254,318
---------- ---------- ---------- ----------
Total expenses............................ 1,821,096 1,832,218 5,433,271 5,241,973
---------- ---------- ---------- ----------
Net income.................................... $ 196,329 $ 65,899 $ 439,247 $ 432,967
========== ========== ========== ==========
Allocation of net income (Note 2):
Investor Limited Partners
(25,000 Units outstanding)................ $ 186,513 $ 62,603 $ 417,285 $ 411,318
========== ========== ========== ==========
Investor Limited Partners Per Unit.......... $ 7.46 $ 2.50 $ 16.69 $ 16.45
========== ========== ========== ==========
Original Limited Partner.................... $ 7,853 $ 2,636 $ 17,570 $ 17,319
========== ========== ========== ==========
General Partners............................ $ 1,963 $ 660 $ 4,392 $ 4,330
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 439,247 $ 432,967
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,300,811 1,327,983
Interest earned on replacement reserve escrow........... (4,405) (2,624)
Changes in assets and liabilities:
Increase in cash restricted for tenant security
deposits............................................ (4,970) (4,696)
Increase in prepaid expenses and other assets......... (148,588) (22,228)
Decrease in due to affiliates......................... (199,500) --
Increase (decrease) in accrued expenses and other
liabilities......................................... 84,944 (75,769)
----------- ----------
Net cash provided by operating activities........... 1,467,539 1,655,633
----------- ----------
Cash flows from investing activities:
Additions to fixed assets................................. (758,800) (738,948)
Deposits to replacement reserve escrow.................... (46,421) (46,421)
Withdrawals from replacement reserve escrow............... -- 86,111
----------- ----------
Net cash used in investing activities............... (805,221) (699,258)
----------- ----------
Cash flows from financing activities:
Distributions............................................. (834,782) (626,058)
Principal payments on mortgage notes payable.............. (324,147) (296,392)
----------- ----------
Net cash used in financing activities............... (1,158,929) (922,450)
----------- ----------
Net (decrease)increase in cash and cash equivalents......... (496,611) 33,925
Cash and cash equivalents, beginning of period.............. 932,065 552,221
----------- ----------
Cash and cash equivalents, end of period.................... $ 435,454 $ 586,146
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-18
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this report on Form 10-Q pursuant to the
Rules and Regulations of the Securities and Exchange Commission. In the opinion
of the General Partners of Krupp Realty Fund, Ltd.-III and Subsidiary (the
"Partnership"), the disclosures contained in this report are adequate to make
the information presented not misleading. See Notes to Consolidated Financial
Statements included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1998 for additional information relevant to significant
accounting policies followed by the Partnership.
In the opinion of the General Partners of the Partnership, the accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the Partnership's
consolidated financial position as of September 30, 1999, its results of
operations for the three and nine months ended September 30, 1999 and 1998, and
its cash flows for nine months ended September 30, 1999 and 1998. Certain prior
period balances have been reclassified to conform with current period
consolidated financial statement presentation.
The results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results which may be expected for the
full year. See Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
(2) CHANGES IN PARTNERS' DEFICIT
A summary of changes in Partners' deficit for the nine months ended
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
INVESTOR
----------------------- ORIGINAL TOTAL
LIMITED LIMITED GENERAL PARTNERS'
PARTNERS PARTNER PARTNERS DEFICIT
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1998.................. $(6,305,460) $(909,737) $(329,394) $(7,544,591)
Net income.................................... 417,285 17,570 4,392 439,247
Distributions................................. (793,043) (33,391) (8,348) (834,782)
----------- --------- --------- -----------
Balance at September 30, 1999................. $(6,681,218) $(925,558) $(333,350) $(7,940,126)
=========== ========= ========= ===========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Partnership pays property management fees to an affiliate of the General
Partners for management services. Pursuant to the management agreements,
management fees are payable monthly at a rate of 5% of the gross receipts from
the properties under management. The Partnership also reimburses affiliates of
the General Partners for certain expenses incurred in connection with the
operation of the Partnership and its properties, including administrative
expenses.
F-19
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
Amounts accrued or paid to the General Partners' affiliates were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Property management fees....................... $ 97,416 $ 94,529 $289,737 $281,469
Expense reimbursements......................... 40,702 41,522 124,941 102,989
-------- -------- -------- --------
Charged to operations........................ $138,118 $136,051 $414,678 $384,458
======== ======== ======== ========
</TABLE>
Expense reimbursements of $25,580 are included in prepaid expenses and other
assets at September 30, 1999 and $199,500 are included in due to affiliates at
December 31, 1998.
F-20
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's ability to generate cash adequate to meet its needs is
dependent primarily upon the operations of its real estate investments. Such
ability is also dependent upon the future availability of bank borrowings and
the potential refinancing and sale of the Partnership's remaining real estate
investments. These sources of liquidity will be used by the Partnership for
payment of expenses related to real estate operations, capital expenditures,
debt service and expenses. Cash Flow, if any, as calculated under Section 8.2(a)
of the Partnership Agreement, will then be available for distribution to the
Partners.
The General Partners, on an ongoing basis, assess the current and future
liquidity needs in determining the levels of working capital reserves the
Partnership should maintain. Adjustments to distributions are made when
appropriate to reflect such assessments. The current annual distribution rate is
$31.72 per Unit, and is paid semiannually in February and August.
In the third quarter of 1999, occupancy rates for the Partnership's
properties ("Properties") remained below the historically high levels achieved
in 1998 of between 99% and 100% as of December 31, 1998 with rates of
approximately 98% (in the case of the Hannibal Grove Apartments), 97% (in the
case of the Brookeville Apartments) and 98% (in the case of the Dorsey's Forge
Apartments) as of September 30, 1999.
In March 1999, the Property Manager prepared a five year capital improvement
plan (the "Capital Plan") setting forth capital improvements that it believes a
third party purchaser of the Properties would regard as necessary to maintain
the Properties' current occupancy and rent levels (subject to inflationary
increases), in light of the increased competition in the markets served by the
Partnership. The aggregate cost of implementing the five year Capital Plan is
estimated to be approximately $10,000,000.
The General Partners are in the process of finalizing the Capital Plan,
which may not be practicable for the Partnership to implement promptly and fully
because of the possible need for additional investment of capital, additional
borrowings and/or the discontinuation of future cash distributions from the
Partnership. However, the General Partners believe additional capital
improvements will be needed in the future and may be over and above historical
levels.
YEAR 2000
The General Partners of the Partnership conducted an assessment of the
Partnership's core internal and external computer information systems and have
taken the necessary steps to understand the nature and extent of the work
required to make its systems Year 2000 ready in those situations in which it is
required to do so. The Year 2000 readiness issue concerns the inability of
computerized information systems to accurately calculate, store or use a date
after 1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and organizations.
In this regard, the General Partners of the Partnership, along with certain
affiliates, began a computer systems project in 1997 to significantly upgrade
its existing hardware and software. The
F-21
<PAGE>
KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY
General Partners completed the testing and conversion of the financial
accounting operating systems in February 1998. As a result, the General Partners
have generated operating efficiencies and believe their financial accounting
operating systems are Year 2000 ready. The General Partners incurred hardware
costs as well as consulting and other expenses related to the infrastructure and
facilities enhancements necessary to complete the upgrade and prepare for the
Year 2000. There are no other significant internal systems or software that the
Partnership is using at the present time.
The General Partners of the Partnership have evaluated Year 2000 compliance
issues with respect to its non-financial systems, such as computer controlled
elevators, boilers, chillers and other miscellaneous systems. The General
Partners do not anticipate any problems in its non-financial systems.
The General Partners of the Partnership surveyed the Partnership's material
third-party service providers (including but not limited to its banks and
telecommunications providers) and significant vendors and received assurances
that such providers and vendors are to be Year 2000 ready. The General Partners
do not anticipate any problems with such providers and vendors that would
materially impact its results of operations, liquidity or capital resources.
In addition, the Partnership is also subject to external forces that might
generally affect industry and commerce, such as utility and transportation
company Year 2000 readiness failures and related service interruptions. However,
the General Partners do not anticipate these would materially impact its results
of operations, liquidity or capital resources.
To date, the Partnership has not incurred, and does not expect to incur, any
significant cost associated with being Year 2000 ready.
OPERATIONS
Net income increased for the three and nine months ended September 30, 1999,
as compared to the three and nine months ended September 30, 1998, as expenses
for the three months ended September 30, 1999 remained relatively stable while
total revenue for the period increased and the increase in expenses for the nine
months ended September 30, 1999 was less than the increase in total revenue for
the period.
Total revenue increased for the three and nine months ended September 30,
1999, as compared to the three and nine months ended September 30, 1998,
primarily due to rental rate increases implemented at all the Partnership's
properties.
Total expenses remained stable for the three months ended September 30,
1999, as compared to the same period in 1998 as increases in operating expenses
were offset by decreases in depreciation and amortization. Operating expense
increased in 1999 as a result of an increase in workmen's compensation expense
due to an adjustment to the workmen's compensation reserve in 1998 as well as
increases in utility expenses. Depreciation and amortization expense decreased
as previously purchased fixed assets became fully depreciated.
Total expenses increased for the nine months ended September 30, 1999 as
compared to the same period in 1998 as a result of increases in operating,
general and administration and maintenance expenses. Operating expense increased
in 1999 as a result of an increase in workmen's compensation expense due to an
adjustment to the workmen's compensation reserve in 1998 as well as increases in
payroll and utility expenses. General and administrative expenses increased as a
result of increases in legal costs primarily associated with the Partnership's
response to the tender offer made by Madison Liquidity Investors 104, LLC to
purchase Partnership units during the second quarter. Maintenance increased due
to increases in snow removal expenses at all properties during the first
quarter, increases in landscaping expenses at Dorsey's Forge and Brookeville and
increases in plumbing expenses at Dorsey's Forge and Hannibal Grove.
F-22
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of , 2000 by and between KRF3 Acquisition Company, L.L.C., a
Delaware limited liability company (the "Company" or, after the Effective Time
(as defined in Article V hereof), the "Surviving Entity"), and Krupp Realty
Fund, Ltd.-III, a Massachusetts limited partnership (the "Partnership").
W I T N E S S E T H:
WHEREAS, the Company is a limited liability company duly formed and validly
existing under the laws of the State of Delaware;
WHEREAS, the Partnership is a limited partnership duly formed and validly
existing under the laws of the Commonwealth of Massachusetts;
WHEREAS, the Massachusetts Revised Uniform Limited Partnership Act, Mass.
Gen. Laws Ann. ch. 109, (Section) 1-62 (the "Massachusetts LP Act"), and the
Delaware Limited Liability Company Act, 6 Del. C. (Section)18-101 et seq. (the
"Delaware LLC Act"), each permits a limited partnership formed and existing
under the Massachusetts LP Act to merge with and into a limited liability
company formed and existing under the Delaware LLC Act;
WHEREAS, the members of the Company have authorized and the general partners
and limited partners of the Partnership have duly authorized the merger of the
Partnership with and into the Company pursuant to the terms of this Agreement;
and
WHEREAS, the holders of limited partnership interests of Fund III have
approved an amendment to the Amended Agreement of Limited Partnership, dated
June 1, 1982, authorizing the Partnership to enter into this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed that, in accordance
with the applicable statutes of the State of Delaware and the Commonwealth of
Massachusetts, and subject to the conditions precedent contained herein, the
Partnership shall be at the Effective Time, merged with and into the Company
(the "Merger"), with the Company to be the Surviving Entity. The mode of
carrying the Merger into effect shall be as follows:
<PAGE>
I.
MERGER
At the Effective Time, the Partnership shall be merged with and into the
Company, the separate existence of the Partnership shall cease, the Company
shall continue in existence and the Merger shall in all respects have the
effects provided for by the Massachusetts LP Act and the Delaware LLC Act.
Prior to the Effective Time, the Company and the Partnership shall take all
such action as shall be necessary or appropriate in order to effectuate the
Merger. If at any time after the Effective Time, the Company shall consider or
be advised that any further assignments, conveyances or assurances in law are
necessary or desirable to carry out the provisions hereof, the proper members,
managers, officers or other agents of the Company, as authorized agents and
attorneys-in-fact for the Partnership (and acting in the name of the Company or
the Partnership), shall execute and deliver any and all proper deeds,
assignments, and assurances in law, and do all such additional things necessary
or proper to carry out the provisions hereof.
II.
TERMS OF TRANSACTION
At the Effective Time, by virtue of the Merger and without any action on the
part of the holders thereof, (i) the partnership interests in the Partnership
outstanding immediately prior to the Effective Time, held by (a) the general
partners of the Partnership (the "General Partners"), (b) the "Original Limited
Partners" (as defined in the Partnership's Amended Agreement of Limited
Partnership, dated as of June 1, 1982, as amended from time to time (the
"Partnership Agreement")) and (c) the limited partners of the Partnership who
are, at the Effective Time, directly or indirectly controlling, controlled by or
under common control with the Company, Equity Resources Group Incorporated or
the General Partners ("the Affiliate Limited Partners"), shall be canceled and
retired and shall cease to exist, (ii) the partnership interests of limited
partners of the Partnership who are not Affiliate Limited Partners (the
"Unaffiliated Limited Partners") outstanding immediately prior to the Effective
Time shall be canceled and converted into and represent the right to receive in
exchange therefor $600 per "Unit" (as defined in the Partnership Agreement),
without interest thereon, payable by the Surviving Entity to the holder of such
Unit (as reflected on the records of the Partnership at the Effective Time) upon
receipt by the Surviving Entity of the Proof of Ownership Form hereto, a
Substitute Form W-9 and any other additional documentation necessary or
desirable to complete the conversion of the Units required which the Surviving
Entity shall reasonably request from the holder, (iii) the limited liability
company interests held by the members of the Company outstanding immediately
prior to the Effective Time shall remain the outstanding limited liability
company interests of such members of the Company, and such members shall
continue as the members of the Surviving Entity.
Neither the Surviving Entity nor any other party hereto shall be liable to a
holder of Units for any payments made to a public official pursuant to
applicable abandoned property laws. The Surviving Company shall be entitled to
deduct and withhold from the amounts otherwise payable to a holder of Units
pursuant to the Merger any taxes or other amounts as are required by applicable
law, including without limitation Sections 3406 and 1445 of the Internal Revenue
Code of 1986, as amended. To the extent that amounts are so withheld by the
Surviving Entity, they shall be treated for all purposes of this Agreement as
having been paid to the holder of the Units in respect of which such deduction
and withholding was made.
After the Effective Time, the transfer books of the Partnership shall be
closed and there shall be no further registration of transfers on the records of
the Partnership of the Units that were outstanding immediately prior to the
Effective Time. As of the Effective Time, each holder of a Unit which was
converted into the right to receive cash pursuant to Article II hereof shall be
deemed to have withdrawn as a limited partner and shall have no further interest
in the Partnership or the Surviving Entity or any allocations or distributions
of income, property or otherwise, other than the right to receive the amount as
provided in this Article II.
No appraisal rights shall be available to holders of Units in connection
with the Merger.
<PAGE>
III.
CERTIFICATE OF FORMATION AND
LIMITED LIABILITY COMPANY AGREEMENT
From and after the Effective Time, and until thereafter amended as provided
by law, the Certificate of Formation and Limited Liability Company Agreement of
the Company as in effect immediately prior to the Effective Time shall be the
Certificate of Formation and Limited Liability Company Agreement of the
Surviving Entity.
IV.
MANAGERS AND OFFICERS
From and after the Effective Time, and until their successors are duly
elected or appointed, or until their earlier death, resignation or removal, the
managers and officers of the Surviving Entity shall be the same as the managers
and officers of the Company immediately prior to the Effective Time.
V.
EFFECTIVE TIME
Certificates of merger evidencing the Merger ("Certificates of Merger")
substantially in the form of Exhibit A attached hereto shall be filed by the
General Partners and the Company with the Secretary of State of the State of
Delaware and the Secretary of State of the Commonwealth of Massachusetts
pursuant to the applicable requirements of the Delaware LLC Act and the
Massachusetts LP Act. The Merger shall become effective upon the later of the
filing of the Certificates of Merger with the Secretary of State of the
Commonwealth of Massachusetts and the Secretary of State of the State of
Delaware or such other time as shall be agreed by the parties and set forth in
the Certificates of Merger and in accordance with the Massachusetts LP Act and
the Delaware LLC Act (such time of effectiveness, the "Effective Time").
VI.
TERMINATION
This Agreement may be terminated at any time prior to the Effective Time:
(i) by mutual written consent of the Company and the General Partners;
(ii) by either the Company or the General Partners if the Merger shall not
have been consummated by [ ]; provided, however, that the right to
terminate this Agreement pursuant to this clause (ii) of Article VI shall not be
available to any party whose failure to perform any of its obligations under
this Agreement has been the cause of, or resulted in, the failure of the Merger
to occur on or before such date.
In the event of a termination of this Agreement by either the Company or the
General Partners, as provided in this Article VI, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of the
Company or the General Partners or their respective managers or officers, except
with respect to Article IX and this second paragraph of Article VI. Nothing
herein shall relieve any party of liability with respect to any fraud or
intentional breach by any party hereto of this Agreement.
VII.
AMENDMENTS
At any time prior to the Effective Time, the Company and the General
Partners may amend, modify or supplement this Agreement in such manner as they
jointly may determine; provided, however, that, such amendment must be executed
in writing by all parties hereto and provided further, that no such amendment,
modification, or supplement shall reduce the amount or change the type of
consideration into which each Unit shall be converted upon consummation of the
Merger or alter or
<PAGE>
change any term of the Certificate of Formation or Limited Liability Company
Agreement of the Surviving Entity.
VIII.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of each party hereto to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(i) this Agreement shall have been approved and adopted by the partners of
the Partnership in accordance with the Massachusetts LP Act and the Partnership
Agreement;
(ii) this Agreement shall have been approved and adopted by the members of
the Company in accordance with the Delaware LLC Act and the Limited Liability
Company Agreement of the Company;
(iii) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, promulgated or enforced by any governmental
entity, and no action, suit, claim or legal, administrative or arbitral
proceeding or investigation shall be pending before any governmental entity
which seeks to prohibit, restrain, enjoin or restrict the consummation of the
transactions contemplated by this Agreement or which seeks to subject any party
to substantial damages as a result of the consummation of the transactions
contemplated by this Agreement;
(iv) each of the parties shall have obtained the consent, approval or waiver
of each non-governmental person whose consent, approval or waiver shall be
required in order for such party to consummate the transactions contemplated by
this Agreement;
(v) since June 30, 1999, no change or event shall have occurred which has
had or could reasonably be expected to result in a Material Adverse Effect. For
purposes of this Agreement, "Material Adverse Effect" means any change, event or
effect (a) in, on or relating to the business of the Partnership that is, or is
reasonably likely to be, materially adverse to the business, assets (including
intangible assets), liabilities (contingent or otherwise), condition (financial
or otherwise), prospects or results of operations of the Partnership and its
subsidiaries taken as a whole, or (b) that may prevent or materially delay the
performance of this Agreement by the Company or the Partnership or the
consummation of the transactions contemplated hereby.
IX.
GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Delaware without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
X.
MISCELLANEOUS
This Agreement may be executed in counterparts, each of which when so
executed shall be deemed to be an original, and such counterparts shall together
constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the day and year first above written.
<TABLE>
<S> <C> <C>
KRF3 ACQUISITION COMPANY, L.L.C.
By: KRF Company, L.L.C.,
its managing member
By: The Krupp Family Limited Partnership-94,
its sole member
By:
-----------------------------------------
Douglas Krupp
GENERAL PARTNER
KRUPP REALTY FUND, LTD.-III
By: The Krupp Corporation,
its general partner
By:
-----------------------------------------
Douglas Krupp
CO-CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
<PAGE>
EXHIBIT A
CERTIFICATE OF MERGER
MERGING
KRUPP REALTY FUND, LTD. - III
INTO
KRF3 ACQUISITION COMPANY, L.L.C.
The undersigned, being respectively, an authorized person of KRF3
Acquisition Company, L.L.C., a Delaware limited liability company and the
general partners of Krupp Realty Fund, Ltd. - III, a Massachusetts limited
partnership, do hereby certify for and on behalf of such entities.
FIRST: The name and jurisdiction of formation of each of the constituent
entities in the merger are as follows:
<TABLE>
<CAPTION>
NAME JURISDICTION OF FORMATION
- ---- -------------------------
<S> <C>
Krupp Realty Fund, Ltd. - III Massachusetts
KRF3 Acquisition Company, L.L.C. Delaware
</TABLE>
SECOND: An Agreement and Plan of Merger between the parties to the merger
has been approved, adopted, certified, executed and/or acknowledged by each of
the constituent entities in accordance with the requirements of Section 16A of
the Massachusetts Revised Uniform Limited Partnership Act and Section 18-209 of
the Delaware Limited Liability Company Act.
THIRD: The name of the surviving limited liability company is KRF3
Acquisition Company, L.L.C.
FOURTH: The merger shall be effective at 5:00 p.m. on the date on which the
latter of (a) the filing of this Certificate of Merger in the Office of the
Secretary of State of the State of Delaware and (b) the filing of this
Certificate of Merger in the Office of the Secretary of State of the
Commonwealth of Massachusetts, occurs.
FIFTH: The executed Agreement and Plan of Merger is on file at a place of
business of the surviving limited liability company. The address of such place
of business is: KRF3 Acquisition Company, L.L.C., One Beacon Street, Suite 1500,
Boston, Massachusetts 02108.
SIXTH: A copy of the Agreement and Plan of Merger will be furnished by the
surviving limited liability company, on request and without cost, to any partner
of the constituent limited partnership and any member of the constituent limited
liability company.
SEVENTH: The surviving limited liability company shall accept service of
process at its offices at One Beacon Street, Suite 1500, Boston, Massachusetts
02108.
IN WITNESS WHEREOF, the undersigned have duly executed this Certificate of
Merger as of , 2000.
<TABLE>
<S> <C> <C>
KRF3 ACQUISITION COMPANY, L.L.C.
By:
-----------------------------------------
Name:
Title:
</TABLE>
<PAGE>
APPENDIX B
AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF
LIMITED PARTNERSHIP OF KRUPP REALTY FUND, LTD. - III
THIS AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP, dated
as of June 1, 1982 (the "Partnership Agreement"), OF KRUPP REALTY FUND, LTD. -
III, a Massachusetts limited partnership (the "Partnership"), by and among The
Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited
Partnership - II, a Massachusetts limited partnership, as General Partners
(together, the "General Partners"), The Krupp Company Limited Partnership-II, as
the Original Limited Partner, and those persons admitted to the Partnership as
Investor Limited Partners and providing their Consent hereto is made as of ,
2000, in accordance with the procedures of Section 14(a) of the Partnership
Agreement. Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to them in the Partnership Agreement.
1. The Partnership Agreement is amended by adding the following prior to the
last sentence of Section 6.2(b) thereof and to Section 6.6 at the conclusion
thereof:
Notwithstanding the foregoing or any other provision contained in the
Partnership Agreement, at any time after February 1, 2000, the Partnership may,
among other items, enter into, consummate and perform its obligations under a
merger agreement with an Affiliate of the General Partner substantially in the
form of the agreement previously delivered to Investor Limited Partners pursuant
to a Proxy Statement and provided that such merger agreement is executed prior
to August 1, 2000.
2. In all other respects the Partnership Agreement shall remain in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized persons as of the
date first above written.
<TABLE>
<S> <C> <C>
THE KRUPP CORPORATION,
GENERAL PARTNER
By:
-----------------------------------------
Name: Douglas Krupp
Title: CO-CHAIRMAN OF THE BOARD
OF DIRECTORS
THE KRUPP COMPANY LIMITED PARTNERSHIP-II,
GENERAL PARTNER AND ORIGINAL LIMITED PARTNER
By: The Krupp Corporation,
GENERAL PARTNER
By:
-----------------------------------------
Name: Douglas Krupp
Title: CO-CHAIRMAN OF THE BOARD
OF DIRECTORS
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<PAGE>
APPENDIX C
FORM OF PROXY CARD
KRUPP REALTY FUND, LTD.-III
ONE BEACON STREET
SUITE 1500
BOSTON, MASSACHUSETTS 02108
Solicited by the General Partners for the Special Meeting of Unitholders to be
held on , 2000
The undersigned hereby appoints , or any of them, each with full power
of substitution, as proxies or proxy of the undersigned and hereby authorizes
them to represent and vote as designated below all investor limited partnership
units of Krupp Realty Fund, Ltd.--III Units (the "Partnership") held of record
by the undersigned at the close of business on , 2000 at the Special
Meeting of Unitholders (the "Special Meeting") to be held on , 2000 at the
Partnership's principal executive offices located at One Beacon Street,
Suite 1500, Boston, Massachusetts, 02108, or any adjournment or postponement
thereof, and, in their discretion, upon all matters incident to the conduct of
the Special Meeting and such other matters as may properly be brought before the
Special Meeting.
This signed Voting Form revokes all proxies previously given by the
undersigned to vote at the Special Meeting of Unitholders or any adjournment or
postponement thereof. The undersigned hereby acknowledges receipt of the Notice
of Special Meeting of Unitholders and the Proxy Statement/ Prospectus relating
to the Special Meeting.
THE GENERAL PARTNERS RECOMMEND A VOTE FOR THE FOLLOWING PROPOSAL.
To approve the Agreement and Plan of Merger between KRF3 Acquisition
Company, L.L.C. and the Partnership and the amendment to the Partnership's
Amended Agreement of Limited Partnership, dated as of June 1, 1982, allowing the
Partnership to enter into the merger agreement and complete the merger with KRF3
Acquisition Company, L.L.C.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
WHEN PROPERLY EXECUTED, THIS VOTING FORM WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS GIVEN, THIS VOTING FORM WILL BE VOTED FOR THE FOREGOING PROPOSAL.
<PAGE>
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW. Dated _______________________, 2000
___________________________________
___________________________________
Signature if held jointly
Please sign exactly as your name
appears on this Voting Form. If
units are registered in more than
one name, the signatures of all
such persons are required. A
corporation should sign in its full
corporate name by a duly authorized
officer, stating such officer's
title. Trustees, guardians,
executors and administrators should
sign in their official capacity
giving their full title as such. A
partnership should sign in the
partnership name by an authorized
person, stating such person's title
and relationship to the
partnership.
PLEASE COMPLETE, DATE, SIGN AND
RETURN THIS VOTING FORM PROMPTLY,
USING THE ENCLOSED ENVELOPE.
ALTERNATIVELY, PLEASE FORWARD BOTH
SIDES OF THE COMPLETED VOTING FORM
BY FACSIMILE TO KRUPP FUNDS GROUP
LIMITED PARTNERSHIP AT
617-423-8919.
/ / I HAVE READ THE ABOVE AND WOULD LIKE TO ATTEND THE SPECIAL MEETING IN
PERSON. PLEASE SEND ME A TICKET FOR ADMISSION TO THE MEETING.
