UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16817
Krupp Insured Plus II Limited Partnership
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-2955007
(IRS employer identification no.)
One Beacon Street, Boston, Massachusetts
(Address of principal executive offices)
02108
(Zip Code)
(617) 523-0066
(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
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.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP BALANCE SHEETS ASSETS June 30, December 31, 2001 2000 ------------------- ------------------ Participating Insured Mortgages ("PIMs") $ 3,125,480 $ 17,541,596 (Note 2) Mortgage-Backed Securities and insured mortgage ("MBS") (Note 3) 30,827,692 21,247,646 ------------------- ------------------ Total mortgage investments 33,953,172 38,789,242 Cash and cash equivalents 6,655,609 3,125,710 Interest receivable and other assets 242,839 275,591 Prepaid acquisition fees and expenses, net of accumulated amortization of $551,175 and $733,572, respectively 17,972 65,905 ------------------- ------------------ Total assets $ 40,869,592 $ 42,256,448 =================== =================== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 36,737 $ 17,889 ------------------- ------------------- Partners' equity (deficit) (Note 4): Limited Partners 40,602,803 42,383,344 (14,655,512 Limited Partner interests outstanding) General Partners (338,996) (337,448) Accumulated comprehensive income 569,048 192,663 ------------------- ------------------- Total Partners' equity 40,832,855 42,238,559 ------------------- ------------------- Total liabilities and Partners' equity $ 40,869,592 $ 42,256,448 =================== =================== The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 ---------------- ------------- -------------- --------------- Revenues: Interest income - PIMs: Basic interest $ 152,093 $ 325,722 $ 488,700 $ 712,277 Participation interest 30,769 - 30,769 - Interest income - MBS 466,875 427,961 876,742 856,121 Other interest income 48,349 68,376 92,806 204,902 ---------------- ------------- --------------- --------------- Total revenues 698,086 822,059 1,489,017 1,773,300 ---------------- -------------- --------------- --------------- Expenses: Asset management fee to an affiliate 65,651 73,551 136,740 153,193 Expense reimbursements to affiliates 31,230 32,694 56,706 59,821 Amortization of prepaid fees and expenses 25,965 21,968 47,933 78,338 General and administrative 40,554 96,489 61,493 109,897 ---------------- -------------- --------------- --------------- Total expenses 163,400 224,702 302,872 401,249 ----------------- -------------- --------------- --------------- Net income 534,686 597,357 1,186,145 1,372,051 Other comprehensive income: Net change in unrealized gain on MBS 246,665 (13,188) 376,385 (46,332) ---------------- -------------- --------------- --------------- Total comprehensive income $ 781,351 $ 584,169 $ 1,562,530 $ 1,325,719 ================ ============== =============== =============== Allocation of net income (Note 4): Limited Partners $ 518,646 $ 579,436 $ 1,150,561 $ 1,330,889 ================ ============== =============== =============== Average net income per Limited Partner interest (14,655,512 Limited Partner interests outstanding) $ .04 $ .04 $ .08 $ .09 ================ ============== =============== =============== General Partners $ 16,040 $ 17,921 $ 35,584 $ 41,162 ================ ============== =============== =============== The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, ------------------------------------ 2001 2000 ------------------------------------ Operating activities: Net income $ 1,186,145 $ 1,372,051 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 47,933 78,338 Premium amortization 38,286 - Changes in assets and liabilities: Decrease in interest receivable and other assets 32,752 180,548 Increase (decrease) in liabilities 18,848 (10,174) ---------------- ------------------ Net cash provided by operating activities 1,323,964 1,620,763 ---------------- ------------------ Investing activities: Principal collections on PIMs 95,367 8,555,845 Principal collections on MBS 5,078,802 594,456 ---------------- ------------------ Net cash provided by investing activities 5,174,169 9,150,301 ---------------- ------------------ Financing activities: Special distributions - (14,802,066) Quarterly distributions (2,968,234) (2,991,059) ---------------- ------------------ Net cash used for financing activities (2,968,234) (17,793,125) ---------------- ------------------ Net increase (decrease) in cash and cash equivalents 3,529,899 (7,022,061) Cash and cash equivalents, beginning of period 3,125,710 11,093,183 ---------------- ------------------ Cash and cash equivalents, end of period $ 6,655,609 $ 4,071,122 ================ ================== Supplemental disclosure of non-cash investing activities: Reclassification of investment in a PIM to a MBS $ 14,320,749 $ - ================ ================== Non cash activities: Increase (decrease) in Fair Value of MBS $ 376,385 $ (46,332) ================ ================== The accompanying notes are an integral part of the financial statements.
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, 2000 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 June 30, 2001, the results of operations for the three and six months ended June 30, 2001 and 2000 and its cash flows for the six months ended June 30, 2001 and 2000. The results of operations for the three and six months ended June 30, 2001 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 May 2001, the Partnership received $30,769 from the borrowers of the Richmond Park PIM as a settlement to release the loan's participation features. The property has never generated sufficient cash flow to pay any participation from property operations nor does it have sufficient value to meet the threshold to pay any participation based on value if the property is sold or refinanced. The borrowers asked for a release of the participation features while keeping the insured first mortgage in place until the property turns around. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property's current condition. The insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS, and the Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold. At June 30, 2001, the Partnership's remaining PIM has a fair market value of $3,241,716 and a gross unrealized gain of $116,236. The Partnership's PIM matures in 2023. 3. MBS During May 2001, the Partnership received a payoff of the Orchard Landing MBS in the amount of $4,440,315. On July 18, 2001 the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds. At June 30, 2001, the Partnership's MBS portfolio has an amortized cost of $18,672,454 and unrealized gains and losses of $569,402 and $354, respectively. At June 30, 2001, the Partnership's insured mortgage has an amortized cost of $11,586,190. The portfolio has maturities ranging from 2007 to 2028. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the six months ended June 30, 2001 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity -------------- -------------- ------------- ------------- Balance at December 31, 2000 $ 42,383,344 $ (337,448) $ 192,663 $ 42,238,559 Net income 1,150,561 35,584 - 1,186,145 Quarterly distributions (2,931,102) (37,132) - (2,968,234) Change in unrealized gain on MBS - - 376,385 376,385 ------------- ------------- ------------- ------------- Balance at June 30, 2001 $ 40,602,803 $ (338,996) $ 569,048 $ 40,832,855 ============= ============= ============= =============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Partnership's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, federal, state or local regulations; adverse changes in general economic or local conditions; pre-payments of mortgages; failure of borrowers to pay participation interests due to poor operating results at properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Partnership and its Affiliates, including the General Partners.
Liquidity and Capital Resources
The most significant demands on the Partnership's liquidity are the quarterly distributions paid to investors of approximately $1.5 million. Funds for investor distributions come from the monthly principal and interest payments received on the PIMs and MBS, the principal prepayments of the PIMs and MBS, and interest earned on the Partnership's cash and cash equivalents. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions. To the extent that quarterly distributions do not fully utilize the cash available for distribution and cash balances increase, the General Partners may adjust the distribution rate or distribute such funds through a special distribution. The portion of distributions attributable to the principal collections reduces the capital resources of the Partnership. As the capital resources decrease, the total cash flows to the Partnership also will decrease and over time will result in periodic adjustments to the distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment is necessary based on projected future cash flows. Based on current projections, the General Partners believe that the Partnership will need to adjust the current distribution rate beginning with the November 2001 distribution. The General Partners will determine the new rate during the third quarter of 2001.
In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investment also may provide participation interest if the underlying property operates successfully. The Partnership may receive a share in any operating cash flow that exceeds debt service obligations and capital needs or a share in any appreciation in value when the property is sold or refinanced. However, this participation is neither guaranteed nor insured, and it is dependent upon whether property operations or its terminal value meet certain criteria.
During May 2001, the Partnership received a payoff of the Orchard Landing MBS in the amount of $4,440,315. On July 18, 2001 the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds.
Also during May 2001, the Partnership received $30,769 from the borrowers of the Richmond Park PIM as a settlement to release the loan's participation features. The property has never generated sufficient cash flow to pay any participation from property operations nor does it have sufficient value to meet the threshold to pay any participation based on value if the property is sold or refinanced. In the property's present condition, there is little likelihood that its status will improve. Vacancy levels have begun to increase, and rental rate increases have been difficult to achieve. Consequently, all of the cash flow generated by the property has gone back into operations. While the borrower has assured that the insured first mortgage debt has been serviced, no major capital improvements have been undertaken that would enhance the property's leasing efforts. Furthermore, routine maintenance and repairs were beginning to be prioritized according to need and available cash. The condition of the property and its inability to generate sufficient cash flow has seriously impaired the ability of the borrower to either sell the property or refinance it without taking a loss. Their business plan is to make a significant investment in the property to correct deferred maintenance and functional obsolescence and to market it for leasing in order to reposition the property for a successful sale or refinance. They were unwilling to make the large investment necessary while the property was encumbered with the PIM's participation features. The borrowers asked for a release of the participation features while keeping the insured first mortgage in place until the property turns around. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property's current condition. The insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS, and the Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold.
The Partnership's only remaining PIM investment is the GNMA security backed by the first mortgage loan on Denrich Apartments. Presently, the borrower is working on refinancing the underlying first mortgage as there are no contractual obligations remaining that would prevent a prepayment of the underlying first mortgage. The property is thirty years old, and as it has aged. Rental rate increases have not kept pace with the increasing costs of maintenance, repairs and replacements. Denrich Apartments does not compete successfully in the Philadelphia neighborhood where it is located. Occupancy, which generally fluctuates in the mid 80% range, is adversely affected by cash constraints that have led to extensive deferred maintenance. Denrich Apartments operated under a long-term workout agreement with the Partnership that expired at the end of 2000. The General Partners do not expect the Partnership to receive participation interest from Denrich Apartments. The General Partners expect the refinancing to occur before the end of the third quarter which would result in a payoff of the Denrich PIM to the Partnership.
Results of Operations
Net income decreased during the three months ended June 30, 2001 as compared to the same period ending June 30, 2000. This decrease was primarily due to lower basic interest on PIMs. This was partially offset by an increase in MBS interest income and a decrease in general and administrative expenses. The reduction in basic interest on PIMs is primarily due to the reclassification of the Richmond Park PIM to an MBS in May 2001 due to the payoff of the participation feature. MBS interest increased due to the reclassification, but this increase was partly offset by the payoff of the Orchard Landing MBS in May 2001. General and administrative expenses decreased during the second quarter of 2001 due to lower processing costs.
Net income decreased during the six months ended June 30, 2001 as compared to the same period ending June 30, 2000. This decrease was primarily due to lower basic interest on PIMs and other interest income. This was partially offset by an increase in MBS interest income, a decrease in general and administrative expenses and a decrease in amortization expense. The reduction in basic interest on PIMs is primarily due to the reclassification of the Richmond Park PIM to an MBS in May 2001. Basic interest on PIMs also decreased due to the payoff of the Greenhouse Apartments PIM in February 2000. MBS interest increased due to the reclassification, but this increase was partly offset by the payoff of the Orchard Landing MBS in May 2001. Other interest income decreased due to significantly lower average cash balances available for short-term investing in the six month period ended June 30, 2001 versus the same period last year. General and administrative expenses were greater during the first six months of 2000 due to higher processing costs. Amortization expense was lower during the first six months of 2001 due to the full amortization of the remaining prepaid fees and expenses of the Greenhouse Apartments PIM during the first six months of 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by the Government National Mortgage Association ("GNMA"), Fannie Mae, the Federal Home Loan Mortgage Corporation ("FHLMC") or the United States Department of Housing and Urban Development ("HUD") and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs 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 full 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.
At June 30, 2001 the Partnership included in cash and cash equivalents approximately $5.4 million held in a money market fund which invests in securities which are primarily direct obligations of the U.S. Government or securities issued by agencies and instrumentalities of the U.S. Government which may be guaranteed, supported or backed by the credit of the U.S. Government or agencies thereof.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At June 30, 2001, the Partnership's PIM and MBS comprised the majority of the Partnership's assets. As such, decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold all of its investments to expected maturity.
The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, when setting regular distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For its remaining PIM, the Partnership continues to monitor the borrower's intention to refinance the underlying first mortgage.
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 of 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: August 3, 2001
Unaudited Distributable Cash Flow and Net Cash Proceeds from Capital Transactions Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions, as defined by Section 17 of the Partnership Agreement (on a GAAP basis), and the source of cash distributions for the quarter ended June 30, 2001 and the period from inception through June 30, 2001. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Six Months Ended Inception Through 6/30/01 6/30/01 ------- -------- (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: - ----------------------- Net Income on a GAAP basis $ 1,186 $ 184,157 Items not requiring (not providing) the use of operating funds: Amortization of prepaid fees and expenses 48 17,804 Acquisition expenses paid from offering proceeds charged to operations - 690 Shared Appreciation Income/prepayment premiums - (6,157) Premium amortization 38 38 Gain on sale of MBS - (377) --------- ----------- Total Distributable Cash Flow ("DCF") $ 1,272 $ 196,155 ========= =========== Limited Partners Share of DCF $ 1,234 $ 190,271 ========= =========== Limited Partners Share of DCF per Unit $ .08 $ 12.98 ========= =========== General Partners Share of DCF $ 38 $ 5,884 ========= =========== Net Proceeds from Capital Transactions: - -------------------------------------- Principal collections on PIMs and PIM sale proceeds including Shared Appreciation Income/prepayment premiums $ 95 $ 174,355 Principal collections on MBS and MBS sale proceeds 5,079 98,606 Reinvestment of MBS and PIM principal collections and sale proceeds - (41,966) Gain on sale of MBS - 377 --------- ----------- Total Net Proceeds from Capital Transactions $ 5,174 $ 231,372 ========= =========== Cash available for distribution (DCF plus proceeds from Capital Transactions) $ 6,446 $ 427,527 ========= =========== Distributions: Limited Partners $ 7,475(a) $ 420,636(b) ========= =========== Limited Partners Average per Unit $ .51(a) $ 28.70(b)(c) ========= =========== General Partners $ 38(a) $ 5,884(b) ========= =========== Total Distributions $ 7,513 $ 426,520 ========= =========== (a) Represents all distributions paid in 2001 except February 2001 quarterly distribution and includes an estimate of the quarterly distribution to be paid in August 2001. Also includes the special distribution of $.31 per Limited Partner interest paid on July 18, 2001 as a result of the Orchard Landing payoff. (b) Includes an estimate of the quarterly distribution to be paid in August 2001 and the special distribution of $.31 per Limited Partner interest paid on July 18, 2001 as a result of the Orchard Landing payoff. (c) Limited Partners average per Unit return of capital as of August 2001 is $15.72 [$28.70 - $12.98]. Return of capital represents that portion of distributions which is not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs.