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
<CAPTION>
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 a 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
<PAGE>
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>
<CAPTION>
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.
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 and 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 shee and statement of income and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<CIK> 0000832091
<NAME> KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-END> Sep-30-1998
<CASH> 11,036,911
<SECURITIES> 92,429,112<F1>
<RECEIVABLES> 627,842
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,077,905<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 106,171,770
<CURRENT-LIABILITIES> 22,829
<BONDS> 0
0
0
<COMMON> 105,353,339<F3>
<OTHER-SE> 795,602<F4>
<TOTAL-LIABILITY-AND-EQUITY> 106,171,770
<SALES> 0
<TOTAL-REVENUES> 8,465,735<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,532,923<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,932,812
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,932,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,932,812
<EPS-PRIMARY> 0<F7>
<EPS-DILUTED> 0<F7>
<FN>
<F1>Includes Participating Insured Mortgages ("PIMs") of $75,449,114 and
Mortgage-Backed Securities ("MBS") of $16,979,998.
<F2>Includes prepaid acquisition fees and expenses of $6,320,003 net of
accumulated amortization of $4,475,668 and prepaid participation servicing fees
of $1,910,030 net of accumulated amortization of $1,676,460.
<F3>Represents total equity of General Partners and Limited Partners. General
Partners deficit of ($148,663) and Limited Partners equity of $105,502,002.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $1,758,364 of amortization of prepaid fees and expenses.
<F7>Net income allocated $177,984 to the General Partners and $5,754,828 to the
Limited Partners. Average net income per Limited Partner interest is $.45 on
12,770,261 Limited Partner interests outstanding.
</FN>
</TABLE>
