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 September 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 September 30, December 31, 2001 2000 ------------------- ------------------ Participating Insured Mortgages ("PIMs") (Note 2) $ 3,113,368 $ 17,541,596 Mortgage-Backed Securities and insured mortgage ("MBS") (Note 3) 30,768,314 21,247,646 ------------------- ------------------ Total mortgage investments 33,881,682 38,789,242 Cash and cash equivalents 1,639,071 3,125,710 Interest receivable and other assets 225,164 275,591 Prepaid acquisition fees and expenses, net of accumulated amortization of $733,572 - 65,905 ------------------- ------------------- Total assets $ 35,745,917 $ 42,256,448 =================== =================== LIABILITIES AND PARTNERS' EQUITY Liabilities $ 154,112 $ 17,889 ------------------- ------------------- Partners' equity (deficit) (Note 4): Limited Partners 35,046,200 42,383,344 (14,655,512 Limited Partner interests outstanding) General Partners (342,978) (337,448) Accumulated comprehensive income 888,583 192,663 ------------------- ------------------- Total Partners' equity 35,591,805 42,238,559 ------------------- ------------------- Total liabilities and Partners' equity $ 35,745,917 $ 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 Nine Months Ended September 30, Ended September 30, -------------------------------- ---------------------------------- 2001 2000 2001 2000 ---------------- ------------- ---------------- --------------- Revenues: Interest income - PIMs: Basic interest $ 62,349 $ 324,571 $ 551,049 $ 1,036,848 Participation interest - - 30,769 - Interest income - MBS 576,176 417,212 1,452,918 1,273,333 Other interest income 23,899 64,170 116,705 269,072 ---------------- ------------- --------------- --------------- Total revenues 662,424 805,953 2,151,441 2,579,253 ---------------- -------------- --------------- --------------- Expenses: Asset management fee to an affiliate 62,792 73,702 199,532 226,895 Expense reimbursements to affiliates 31,230 32,694 87,936 92,515 Amortization of prepaid fees and expenses 17,972 21,968 65,905 100,306 General and administrative 84,288 78,249 145,781 188,146 ---------------- -------------- --------------- --------------- Total expenses 196,282 206,613 499,154 607,862 ---------------- -------------- --------------- --------------- Net income 466,142 599,340 1,652,287 1,971,391 Other comprehensive income: Net change in unrealized gain on MBS 319,535 29,729 695,920 (16,603) ---------------- -------------- --------------- --------------- Total comprehensive income $ 785,677 $ 629,069 $ 2,348,207 $ 1,954,788 ================ ============== =============== =============== Allocation of net income (Note 4): Limited Partners $ 452,157 $ 581,360 $ 1,602,718 $ 1,912,249 ================ ============== =============== =============== Average net income per Limited Partner interest (14,655,512 Limited Partner interests outstanding) $ .03 $ .04 $ .11 $ .13 ================ ============== =============== =============== General Partners $ 13,985 $ 17,980 $ 49,569 $ 59,142 ================ ============== =============== =============== The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, ------------------------------------ 2001 2000 ------------------------------------ Operating activities: Net income $ 1,652,287 $ 1,971,391 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 65,905 100,306 Premium Amortization 29,746 - Changes in assets and liabilities: Decrease in interest receivable and other assets 50,427 184,515 Increase (decrease) in liabilities 136,223 (5,287) ---------------- ------------------ Net cash provided by operating activities 1,934,588 2,250,925 ---------------- ------------------ Investing activities: Principal collections on PIMs 107,479 8,618,699 Principal collections on MBS 5,466,255 894,812 ---------------- ------------------ Net cash provided by investing activities 5,573,734 9,513,511 ---------------- ------------------ Financing activities: Special distributions (4,543,209) (14,802,066) Quarterly distributions (4,451,752) (4,475,191) ---------------- ------------------ Net cash used for financing activities (8,994,961) (19,277,257) ---------------- ------------------ Net decrease in cash and cash equivalents (1,486,639) (7,512,821) Cash and cash equivalents, beginning of period 3,125,710 11,093,183 ---------------- ------------------ Cash and cash equivalents, end of period $ 1,639,071 $ 3,580,362 ================ ================== 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 $ 695,920 $ (16,603) ================ ================== 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 September 30, 2001, its results of operations for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 2001 and 2000. The results of operations for the three and nine months ended September 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 never generated sufficient cash flow to pay any participation from property operations nor did it have sufficient value to meet the threshold to pay any participation based on value if the property was 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 September 30, 2001, the Partnership's remaining PIM had a fair market value of $3,265,145 and gross unrealized gains of $151,777. 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 September 30, 2001, the Partnership's MBS portfolio had an amortized cost of $18,325,132 and gross unrealized gains of $888,583. At September 30, 2001, the Partnership's insured mortgage had an amortized cost of $11,554,599. The Partnership's MBS had maturities ranging from 2007 to 2028. Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 4. Changes in Partners' Equity --------------------------- A summary of changes in Partners' Equity for the nine months ended September 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 1,602,718 49,569 - 1,652,287 Quarterly distributions (4,396,653) (55,099) - (4,451,752) Special distribution (4,543,209) - - (4,543,209) Change in unrealized gain on MBS - - 695,920 695,920 ------------- ----------- ----------- -------------- Balance at September 30, 2001 $ 35,046,200 $ (342,978) $ 888,583 $ 35,591,805 ============= =========== =========== ==============
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 ResourcesThe 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 February 2002 distribution. The General Partners will determine the new rate during the fourth 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 never generated sufficient cash flow to pay any participation from property operations nor did it have sufficient value to meet the threshold to pay any participation based on value if the property was 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. Due to the complex issues associated with refinancing this property, the General Partners do not expect the borrower will be able to close his refinancing transaction until 2002. If the borrower is successful, it would result in a payoff of the Denrich PIM to the Partnership.
Results of OperationsNet income decreased in the three months ended September 30, 2001 as compared to the same period ending September 30, 2000 primarily due to lower basic interest on PIMs and other interest income. This decrease was partially offset by an increase in MBS interest income and a decrease in asset management fees. 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. Other interest income decreased due to significantly lower average interest rates earned on cash balances available for short-term investing in the three-month period versus the same period last year. The decrease in asset management fees is a result of the Partnership's asset base declining from the Orchard Landing MBS prepayment.
Net income decreased in the nine months ended September 30, 2001 as compared to the same period ending September 30, 2000 primarily due to lower basic interest on PIMs and other interest income. This decrease was partially offset by an increase in MBS interest income and decreases in general and administrative expenses, asset management fees and 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 partially offset by the payoff of the Orchard Landing MBS in May 2001. Other interest income decreased due to significantly lower average interest rates earned on cash balances available for short-term investing in the nine-month period ended September 30, 2001 versus the same period last year. General and administrative expenses were greater during the first nine months of 2000 due to higher processing costs. Asset management fees decreased due to the decrease in the Partnership's investments as a result of principal collections and payoffs. Amortization expense was greater during the nine months ended September 30, 2000 as compared to September 30, 2001 as a result of the full amortization of the remaining prepaid fees and expenses on the PIM prepayments in the first nine 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 September 30, 2001 the Partnership included in cash and cash equivalents approximately $1.3 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization.
Interest Rate RiskThe 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 September 30, 2001, the Partnership's PIMs and MBS comprise 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: November 2, 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 September 30, 2001 and the period from inception through September 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. Nine Months Ended Inception Through 9/30/01 9/30/01 ------- -------- (Amounts in thousands, except per Unit amounts) Distributable Cash Flow: - ----------------------- Net Income on a GAAP basis $ 1,652 $ 184,623 Items not requiring (not providing) the use of operating funds: Amortization of prepaid fees and expenses 66 17,822 Acquisition expenses paid from offering proceeds charged to operations - 690 Shared Appreciation Income/prepayment premiums - (6,157) Premium amortization 30 30 Gain on sale of MBS - (377) --------- ----------- Total Distributable Cash Flow ("DCF") $ 1,748 $ 196,631 ========= =========== Limited Partners Share of DCF $ 1,695 $ 190,732 ========= =========== Limited Partners Share of DCF per Unit (14,655,512) $ .11 $ 13.01 ========= =========== General Partners Share of DCF $ 53 $ 5,899 ========= =========== Net Proceeds from Capital Transactions: - -------------------------------------- Principal collections on PIMs and PIM sale proceeds including Shared Appreciation Income/prepayment premiums $ 107 $ 174,367 Principal collections on MBS and MBS sale proceeds 5,466 98,993 Reinvestment of MBS and PIM principal collections and sale proceeds - (41,966) Gain on sale of MBS - 377 --------- ----------- Total Net Proceeds from Capital Transactions $ 5,573 $ 231,771 ========= =========== Cash available for distribution - ------------------------------- (DCF plus proceeds from Capital Transactions) $ 7,321 $ 428,402 ========= =========== Distributions: - -------------- Limited Partners $ 8,940(a) $ 422,101(b) ========= =========== Limited Partners Average per Unit $ .61(a) $ 28.80(b)(c) ========= =========== General Partners $ 53(a) $ 5,899(b) ========= =========== Total Distributions $ 8,993 $ 428,000 ========= =========== (a) Represents all distributions paid in 2001 except February 2001 quarterly distribution and includes an estimate of the quarterly distribution to be paid in November 2001. (b) Includes an estimate of the quarterly distribution to be paid in November 2001. (c) Limited Partners average per Unit return of capital as of November 2001 is $15.79 [$28.80 - $13.01]. 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.