UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-16817
Krupp Insured Plus-II Limited Partnership
Massachusetts 04-2955007
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip Code)
(617) 423-2233
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including
those identified herein.
<TABLE>
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
BALANCE SHEETS
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
Participating Insured Mortgages ("PIMs")
<S> <C> <C>
(Note 2) $ 89,445,563 $122,048,053
Mortgage-Backed Securities and multi-family
insured mortgages("MBS") (Note 3) 38,256,874 44,727,693
Total mortgage investments 127,702,437 166,775,746
Cash and cash equivalents 8,692,114 9,052,480
Interest receivable and other assets 860,325 1,180,660
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,975,500
and $8,293,080, respectively 1,250,454 2,481,160
Prepaid participation servicing fees, net of
accumulated amortization of $2,251,632 and
$2,707,314, respectively 292,191 636,931
Total assets $138,797,521 $180,126,977
LIABILITIES AND PARTNERS' EQUITY
Liabilities 26,364 25,588
Partners' equity (deficit) (Note 4):
Limited Partners 137,366,345 178,597,484
(14,655,512 Limited Partner
interests outstanding)
General Partners (310,063) (265,315)
Unrealized gain on MBS 1,714,875 1,769,220
Total Partners' equity 138,771,157 180,101,389
Total liabilities and partners' equity $138,797,521 $180,126,977
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998
1997
Revenues:
Interest income - PIMs:
<S> <C> <C> <C> <C>
Base interest $1,702,648 $2,792,679 $5,817,579 $8,727,433
Participation interest 252,416 465,023 2,400,673 1,248,218
Interest income - MBS 723,304 743,120 2,594,608 2,342,258
Other interest income 202,494 106,415 778,994 335,207
Total revenues 2,880,862 4,107,237 11,591,854 12,653,116
Expenses:
Asset management fee to an
affiliate 239,030 340,155 779,026 1,047,368
Expense reimbursements to
affiliates 24,426 42,576 33,022 119,693
Amortization of prepaid
expenses and fees 286,770 464,218 1,575,446 1,455,134
General and administrative 54,586 30,278 189,767 186,184
Total expenses 604,812 877,227 2,577,261 2,808,379
Net income $2,276,050 $3,230,010 $9,014,593 $ 9,844,737
Allocation of net income (Note 4):
Limited Partners $2,207,768 $3,133,109 $8,744,155 $ 9,549,394
Average net income per
Limited Partner interest
(14,655,512 Limited Partner
interests outstanding) $ .15 $ .21 $ .60 $ .65
General Partners $ 68,282 $ 96,901 $ 270,438 $ 295,343
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
Operating activities:
<S> <C> <C>
Net income $ 9,014,593 $ 9,844,737
Adjustments to reconcile net income to
net cash provided by operating activities:
Shared appreciation interest and prepayment
premiums (1,471,582) (334,250)
Amortization of prepaid expenses and fees 1,575,446 1,455,134
Changes in assets and liabilities:
Increase (decrease) in interest receivable
And other assets 320,335 334,447
Increase (decrease) in liabilities 776 (777)
Net cash provided by operating
activities 9,439,568 11,299,291
Investing activities:
Principal collections on PIMs including shared
appreciation income and prepayment premiums
of $1,335,952 in 1998 and $334,250 in 1997 33,938,442 11,207,017
Principal collections on MBS including
prepayment premiums of $135,630 in 1998 6,552,104 3,699,264
Net cash provided by investing
activities 40,490,546 14,906,281
Financing activities
Special distributions (37,664,665) (10,405,413)
Quarterly distributions (12,625,815) (12,641,944)
Net cash used for financing activities (50,290,480) 23,047,357)
Net (decrease) increase in cash and cash
equivalents (360,366) 3,158,215
Cash and cash equivalents, beginning of period 9,052,480 7,921,270
Cash and cash equivalents, end of period $ 8,692,114 $11,079,485
Supplemental disclosure of non-cash
investing activities:
Reclassification of investment
in PIM to an MBS $ - $11,850,469
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on
Form 10-Q pursuant to the Rules and Regulations of the Securities and
Exchange Commission. However, in the opinion of the general partners,
Krupp Plus Corporation and Mortgage Services Partners Limited
Partnership, (collectively the "General Partners") of Krupp Insured
Plus-II Limited Partnership (the "Partnership"), the disclosures
contained in this report are adequate to make the information presented
not misleading. See Notes to Financial Statements included in the
Partnership's Form 10-K for the year ended December 31, 1997 for additional
information relevant to significant accounting policies followed by the
Partnership.
In the opinion of the General Partners of the Partnership, the
accompanying unaudited financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the Partnership's financial position as of September 30, 1998,
its results of operations for the three and nine months ended September
30, 1998 and 1997 and its cash flows for the nine months ended September
30, 1998 and 1997.
The results of operations for the three and nine months ended September
30, 1998 are not necessarily indicative of the results which may be
expected for the full year. See Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this report.
2. PIMs
During the second quarter of 1998, the Partnership received prepayments
of the Harbor House and Longwood Villas Apartments PIMs. The Partnership
received the outstanding principal balance of $12,146,408 and shared
appreciation income of $750,000 from the Harbor House PIM and the
outstanding principal balance of $6,261,587 from the Longwood Villas PIM.
During the first quarter of 1998, the Partnership received a prepayment
penalty of $62,616 from the Longwood Villas PIM. The Partnership made a
special distribution of $.43 per Limited Partner interest relating to the
Longwood Villas Apartments PIM on July 17, 1998 and a special distribution
of $.88 per Limited Partner interest for the Harbor House Apartment PIM
prepayment was made on July 24, 1998.
During the first quarter of 1998, the Partnership received prepayments of
the Westbrook Manor, Fallwood and Greenbrier Apartment PIMs in the amounts
of $4,841,446, $6,505,922, and $2,196,031, respectively. In addition to
the prepayments, the Partnership received $416,810 of Shared Appreciation
Interest and $632,002 of Minimum Additional Interest and Shared Income
Interest. On March 27, 1998, the Partnership made a special distribution
to the investors of $.94 per Limited Partner interest.
On October 19, 1998, the Partnership received a prepayment on the Walden
Village Apartment's PIM of approximately $6,990,000. On September 30, 1998,
Shared Appreciation interest of $106,526 was received by the Partnership.
At September 30, 1998, the Partnership's PIM portfolio has a fair
value of $89,952,644 and gross unrealized gains of $507,081. The
Partnership's PIMs have maturities ranging from 2009 to 2031. At
September 30, 1998 there are no insured mortgage loans within the
Partnership's portfolio that are delinquent with respect to principal or
interest payments.
continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. MBS
On June 19, 1998, the Partnership received a prepayment of the Brookside
insured mortgage in the amount of $4,605,549, representing the outstanding
principal balance, and a prepayment penalty of $18,300. The Partnership
made a special distribution of $.32 per limited partner interest on July
24, 1998.
On October 15, 1998, the Partnership received a repayment on the
Lily Flagg MBS of approximately $11,722,000. A prepayment penalty
of $117,330 was received on September 17, 1998.
At September 30, 1998, the Partnership's MBS portfolio has an amortized
cost of $36,541,999 and gross unrealized gains of $1,714,875. The
Partnership's MBS have maturities ranging from 2007 to 2033.
In June 1997, Statement of Financial Accounting Standards No. 130,
'Reporting Comprehensive Income' (FASB 130), was issued establishing
standards for reporting and displaying comprehensive income and its
components effective January 1, 1998. FASB 130 requires comprehensive
income and its components, as recognized under accounting standards, to
be displayed in a financial statement with the same prominence as other
financial statements, if material. FASB 130 had no material effect
on the Partnership's financial position or results of operations.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the nine months ended
September 30, 1998 is as follows:
<TABLE>
Total
Limited General Unrealized Partners=
Partners Partners Gain (Loss) Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $178,597,484 $(265,315) $ 1,769,220 $180,101,389
Net income 8,744,155 270,438 - 9,014,593
Quarterly distributions (12,310,629) (315,186) - (12,625,815)
Special distributions (37,664,665) - - (37,664,665)
Change in unrealized gain
On MBS - - (54,345) (54,345)
Balance at September 30,1998 $137,366,345 $(310,063) $1,714,875 $138,771,157
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and
future events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
The General Partners of the Partnership have conducted an assessment of the
Partnership's core internal and external computer information systems and
have taken the further necessary steps to understand the nature and extent of
the work required to make its systems Year 2000 ready in those situations in
which it is required to do so. The Year 2000 readiness issue concerns the
inability of computerized information systems to accurately calculate, store
or use a date after 1999. This could result in a system failure or
miscalculations causing disruptions of operations. The Year 2000 issue affects
virtually all companies and all organizations.
In this regard, the General Partners of the Partnership, along with certain
affiliates, began a computer systems project in 1997 to significantly upgrade
its existing hardware and software. The General Partners completed the testing
and conversion of the financial accounting operating systems in February 1998.
As a result, the General Partners have generated operating efficiencies and
believe their financial accounting operating systems are Year 2000 ready. The
Partnership incurred hardware costs as well as consulting and other expenses
related to the infrastructure and facilities enhancements necessary to complete
the upgrade and prepare for the Year 2000. There are no other systems or
software that the Partnership is using at the present time.
The General Partners of the Partnership are in the process of evaluating the
potential adverse impact that could result from the failure of material third-
party service providers (including but not limited to its banks and
telecommunications providers) and significant vendors to be Year 2000 ready.
No estimate can be made at this time as to the impact of the readiness of such
third parties.
Liquidity and Capital Resources
The most significant demands on the Partnership's liquidity are regular
quarterly distributions paid to investors of approximately $4.2 million.
Funds used for investor distributions are generated from interest income
received on the PIMs, MBS, cash and short-term investments, and the principal
collections received on the PIMs and MBS. The Partnership funds a portion of the
distribution from principal collections causing the capital resources of the
Partnership to continually decrease. As a result of this decrease, the total
cash inflows to the Partnership will also decrease, which will result in
periodic downward adjustments to the distributions paid to investors.
As a result of the five PIM prepayments (Fallwood, Greenbrier, Westbrook
Manor, Harbor House and Longwood Villas) and Brookside insured mortgage,
the Partnership made special distributions totalling $2.57 per unit from the
payoff proceeds. In addition, the Partnership will be making an additional
special distribution of approximately $1.29 per unit from the payoff proceeds
of the Lily Flagg MBS and Walden Village Apartment PIM. Consequently, the
Partnership's capital resources and its future cash flows will be lower.
However, at this time the General Partners have determined that the
Partnership can maintain its current dividend rate of $1.12 per unit per year
for the near future. The General Partners periodically review the distribution
rate to determine whether an adjustment is necessary based on projected future
cash flows. In general, the General Partners try to set a distribution rate
that provides for level quarterly distributions of cash available for
distribution. To the extent quarterly distributions differ from cash available
for distribution, the General Partners may adjust the distribution rate or
distribute funds through a special distribution. In the event of additional PIM
prepayments the Partnership would be required to distribute any proceeds from
the prepayments as a special distribution which may cause an adjustment to
the distribution rate to reflect the anticipated future cash inflows from the
remaining mortgage investments.
During the second quarter of 1998, the Partnership was notified of potential
payoffs on the Le Couer du Monde, Carlyle Court, Hillside Court and Waterford
Court Apartments PIMs. If any of these transactions take place, the Partnership
would receive unpaid participation interest earned on prior years operations
and either its share of any increase in the properties' value or a prepayment
penalty. Any repayment proceeds, Shared Appreciation Income and prepayment
penalties would be distributed to the Limited Partners through a special
distribution.
The Partnership has the option to call certain PIMs by accelerating their
maturity if the loans are not prepaid by the tenth year after permanent funding.
The Partnership will determine the merits of exercising the call option for each
PIM as economic conditions warrant. Such factors as the condition of the asset,
local market conditions, interest rates and available financing will have an
impact on this decision.
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by the
Government National Mortgage Association (AGNMA@), Fannie Mae, the Federal
Home Loan Mortgage Corporation (AFHLMC@) or the United States Department of
Housing and Urban Development (AHUD@) and therefore the certainty of their
cash flows and the risk of material loss of the amounts invested depends on the
creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs and
is wholly-owned by the twelve Federal Home Loan Banks. These obligations are
not guaranteed by the U.S. Government or the Federal Home Loan Bank Board.
GNMA guarantees the timely payment of principal and basic interest on the
securities it issues, which represents interest in pooled mortgages insured by
HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed
by the full faith and credit of the U.S. Government.
Operations
The following discussion relates to the operation of the Partnership during
the three and nine months ended September 30, 1998 and 1997.
Net income decreased for the three months ended September 30, 1998 as
compared to the same period in 1997. This decrease was due primarily to lower
base interest on PIMs and participation interest. This was partially offset
by an increase in interest income on cash and cash equivalents and a decrease
in asset management fees and amortization expense. The significant decrease
in base interest on PIMs was caused by the prepayments of the Westbrook,
Fallwood, Greenhouse, Harbor House and Longwood Villas PIMs during the first
six months of 1998 and Colonial Park and Pine Ridge PIMs during the fourth
quarter of 1997. The decrease in participation interest is due to the
Partnership receiving a lower amount of Shared Interest Income for the three
months ended September 30, 1998 as compared to the same period in 1997.
Interest income on cash and cash equivalents increased due to the Partnership
having higher average short-term investment balances during the three months
ended September 30, 1998 as compared to the same period in 1997. The decrease
in asset management fees was a result of the PIM prepayments mentioned above
that reduced the asset base. The decrease in amortization expense was a
result of the Partnership fully amortizing the costs associated with the PIM's
that were prepaid in the third quarter of 1997.
Net income decreased for the nine months ended September 30, 1998 as compared
to the same period in 1997. This decrease was due primarily to significantly
lower base interest on PIMs and an increase in amortization expense. This was
partially offset by increases in participation interest, interest income on MBS,
interest income on cash and cash equivalents and decreases in asset management
fees and expense reimbursements. The significant decrease in base interest on
PIMs was caused by the prepayments of the Westbrook Manor, Fallwood, Greenhouse,
Harbor House and Longwood Villas PIMs during the first six months of 1998 and
Lakeside, Colonial Park and Pine Ridge PIMs during 1997. In addition, base
interest on PIMs decreased and interest on MBS increased due to the
conversion of the Lily Flagg PIM to a multi-family insured mortgage during the
fourth quarter of 1997. The Partnership realized a significant increase in
participation income due primarily to Shared Appreciation Income realized
from the 1998 PIM prepayments of the Harbor House, Westbrook Manor, Fallwood
and Greenbrier Apartment PIMs, as compared to the 1997 Lakeside PIM prepayment.
The Partnership realized additional participation income from the Stanford,
Carlyle, Waterford and Walden Village Apartment PIMs and the Brookside and Lily
Flagg MBS' which exceeded the amount of participation income realized during
the same period of 1997. Interest income on cash and cash equivalents increased
due to the Partnership having higher average short-term investment balances as
a result of the prepayments mentioned above during the nine months ended
September 30, 1998 as compared to the same period in 1997. The decrease in asset
management fees was a result of the 1998 PIM prepayments mentioned above that
reduced the asset base. The Partnership received a rebate for expense
reimbursements related to 1997 during the second quarter of 1998, helping to
offset the decrease in net income for the nine months ended September 30, 1998.
The increase in amortization expense is because the Partnership fully amortized
the remaining balances of prepaid fees and expenses associated with the
Fallwood, Westbrook Manor, Greenbrier, Harbor House, Longwood Villa's Apartment
PIMs Brookside MBS prepayments during 1998.
Interest income on PIMs and MBS will continue to decline as principal
collections reduce the outstanding balance of the portfolios. The
Partnership funds a portion of distributions with MBS and PIM principal
collections, which reduces the invested assets generating income for the
Partnership. As the invested assets decline so will interest income on MBS,
base interest income on PIMs and other interest income.
<PAGE>
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote Security Holders
Response: None
Item 5. Other information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Response: None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Krupp Insured Plus-II Limited Partnership
(Registrant)
BY: /s/Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer of
Krupp Plus Corporation, a General Partner.
Date: October 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of income and is qualified in its entirety by reference to
such financial statements
</LEGEND>
<CIK>0000805297
<NAME>KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-END> Sep-30-1998
<CASH> 8,692,114
<SECURITIES> 127,702,437<F1>
<RECEIVABLES> 860,325
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,542,645<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 138,797,521
<CURRENT-LIABILITIES> 26,364
<BONDS> 0
0
0
<COMMON> 137,056,282<F3>
<OTHER-SE> 1,714,875<F4>
<TOTAL-LIABILITY-AND-EQUITY> 138,797,521
<SALES> 0
<TOTAL-REVENUES> 11,591,854<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,577,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,014,593
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,014,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,014,593
<EPS-PRIMARY> 0<F7>
<EPS-DILUTED> 0<F7>
<FN>
<F1>Includes Participating Insured Mortgages ("PIMs") of $89,445,563 and
Mortgage-Backed Securities ("MBS") of $38,256,874.
<F2>Includes prepaid acquisition fees and expenses of $8,225,954 net of
accumulated amortization of $6,975,500 and prepaid participation servicing fees
of $2,543,823 net of accumulated amortization of $2,251,632.
<F3>Represents total equity of General Partners and Limited Partners. General
Partners deficit of ($310,063) and Limited Partners equity of $137,366,345.
<F4>Unrealized gains on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $1,575,446 of amortization of prepaid fees and expenses.
<F7>Net income allocated $270,438 to the General Partners and $8,744,155 to the
Limited Partners. Average net income per Limited Partner interest is $.60 on
14,655,512 Limited Partner interests outstanding.
</FN>
</TABLE>
