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 March 31, 2002
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. When used in this Form 10-Q, the words "believes," "anticipates," "expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the negative of such words) and similar expressions are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties, including but not limited to the following: federal, state or local regulations; adverse changes in general economic or local conditions; prepayments of mortgages; failure of borrowers to pay participation interests due to poor operating results of properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Partnership and its Affiliates, including the General Partners. The Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2001, contain additional information concerning such risk factors. Actual results in the future could differ materially from those described in any forward-looking statements as a result of the risk factors set forth above, and the risk factors described in the Annual Report.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
------------- --------------
Participating Insured Mortgages ("PIMs") (Note 2) $ 3,088,386 $ 3,101,005
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 29,257,446 30,211,162
------------- --------------
Total mortgage investments 32,345,832 33,312,167
Cash and cash equivalents 1,690,819 933,678
Interest receivable and other assets 214,314 221,124
------------- --------------
Total assets $ 34,250,965 $ 34,466,969
============= ==============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 26,587 $ 17,875
------------- --------------
Partners' equity (deficit) (Note 4):
Limited Partners
(14,655,512 Limited Partner
interests outstanding) 33,879,793 34,084,355
General Partners (340,681) (341,667)
Accumulated comprehensive income 685,266 706,406
------------- --------------
Total Partners' equity 34,224,378 34,449,094
------------- --------------
Total liabilities and partners' equity $ 34,250,965 $ 34,466,969
============ ==============
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
Ended March 31,
----------------------------------
2002 2001
------------- -----------
Revenues:
Interest income - PIMs:
Basic interest $ 61,852 $ 336,607
Interest income - MBS 583,569 409,867
Other interest income 5,675 44,457
----------- -----------
Total revenues 651,096 790,931
----------- -----------
Expenses:
Asset management fee to an affiliate 59,589 71,089
Expense reimbursements to affiliates 24,477 25,476
Amortization of prepaid fees and expenses - 21,968
General and administrative 22,479 20,939
----------- -----------
Total expenses 106,545 139,472
----------- ------------
Net income 544,551 651,459
Other comprehensive income:
Net change in unrealized gain on MBS (21,140) 129,720
----------- -----------
Total comprehensive income $ 523,411 $ 781,179
=========== ===========
Allocation of net income (Note 4):
Limited Partners $ 528,214 $ 631,915
=========== ===========
Average net income per Limited Partner
interest (14,655,512 Limited Partner
interests outstanding) $ .04 $ .04
=========== ===========
General Partners $ 16,337 $ 19,544
=========== ===========
The accompanying notes are an integral
part of the financial statements
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
----------------------------------
2002 2001
-------------- --------------
Operating activities:
Net income $ 544,551 $ 651,459
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of prepaid fees and expenses - 21,968
Changes in assets and liabilities:
Decrease in interest receivable and other assets 6,810 6,958
Increase (decrease) in liabilities 8,712 (12,337)
-------------- --------------
Net cash provided by operating activities 560,073 668,048
-------------- --------------
Investing activities:
Principal collections on PIMs 12,619 65,358
Principal collections on MBS 932,576 285,757
-------------- --------------
Net cash provided by investing activities 945,195 351,115
-------------- --------------
Financing activity:
Quarterly distributions (748,127) (1,490,178)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 757,141 (471,015)
Cash and cash equivalents, beginning of period 933,678 3,125,710
-------------- --------------
Cash and cash equivalents, end of period $ 1,690,819 $ 2,654,695
============== ==============
Non cash activities:
Increase (decrease) in Fair Value of MBS $ (21,140) $ 129,720
============== ==============
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 accounting principles
generally accepted in the United States of America 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, 2001 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 March 31, 2002 and the
results of operations and cash flows for the three months ended March
31, 2002 and 2001.
The results of operations for the three months ended March 31, 2002 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
At March 31, 2002, the Partnership's remaining PIM had a fair market
value of $3,250,526 and gross unrealized gains of $162,140. The
Partnership's PIM matures in 2023.
3. MBS
At March 31, 2002, the Partnership's MBS portfolio had an amortized cost
of approximately $17,082,593 and unrealized gains of approximately
$685,266. At March 31, 2002, the Partnership's insured mortgage had an
amortized cost of $11,489,587. The portfolio has maturities ranging from
2007 to 2028.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the three months ended
March 31, 2002 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
-------------- ----------- ----------- --------------
Balance at December 31, 2001 $ 34,084,355 $ (341,667) $ 706,406 $ 34,449,094
Net income 528,214 16,337 - 544,551
Quarterly distributions (732,776) (15,351) - (748,127)
Change in unrealized gain on MBS - - (21,140) (21,140)
-------------- ----------- ----------- --------------
Balance at March 31, 2002 $ 33,879,793 $ (340,681) $ 685,266 $ 34,224,378
============== =========== =========== ==============
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 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
At March 31, 2002, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $1.7 million as well as the cash flow provided
by its investment in the remaining PIM and MBS. The Partnership anticipates
that these sources will be adequate to provide the Partnership with
sufficient liquidity to meet its obligations as well as to provide
distributions to its investors.
The most significant demand on the Partnership's liquidity is the quarterly
distributions paid to investors which are approximately $733,000. Funds for
the quarterly distributions come from the monthly principal and interest
payments received on the remaining PIM and MBS, the principal prepayments of
the MBS and interest earned on the Partnership's cash and cash equivalents.
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. 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
Partnership will pay its current distribution rate of $.05 per Limited
Partner interest per quarter in May. The Partnership anticipates making a
special distribution related to the Denrich payoff in May or June. Upon
payoff of the Denrich PIM, the Partnership will determine the market value
of the remaining assets in the Partnership and anticipates that a final
liquidating distribution will be made prior to year end.
The Partnership's only remaining PIM investment is the Government National
Mortgage Association ("GNMA") security backed by the first mortgage loan on
Denrich Apartments. Presently, the borrower is finalizing the refinancing of
the underlying first mortgage. The Partnership will not receive any
participation interest from the Denrich Apartments due to the condition of
the real estate. Proceeds from the refinancing in excess of those needed to
pay off the existing mortgage are required to go back in to the property to
cure the deferred maintenance and capital improvement needs at the property.
However, the Partnership will receive a portion of the accumulated but
unpaid interest that resulted from the interest rate reduction agreement
entered into in June, 1995.
Critical Accounting Policy
The Partnership's critical accounting policy relates primarily to revenue
recognition related to the participation feature of the Partnership's PIM
investment. The Partnership's policy is as follows:
Basic interest on the PIM is recognized based on the stated coupon rate of
the GNMA MBS. The Partnership's recognizes interest related to the
participation feature when the amount becomes fixed and the transaction that
gives rise to such amount is consummated.
Results of Operations
Net income decreased in the first quarter of 2002 as compared to the first
quarter of 2001 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 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. 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 cash balances
available for short-term investing and the interest rates earned on those
balances in the three-month period ended March 31, 2002 versus the same
period last year. 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 three months ended March 31,
2001 as compared to March 31, 2002 as a result of the remaining prepaid fees
and expenses on the PIM prepayments being fully amortized as of September
2001.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by
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 March 31, 2002 the Partnership includes in cash and cash equivalents
approximately $1.5 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 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 March 31, 2002, the Partnership's remaining PIM and MBS comprise
the majority of the Partnership's assets. Decreases in interest rates may
accelerate the prepayment of the Partnership's investments. Increases in
interest rates may decrease the proceeds from a sale of the MBS.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
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: May 1, 2002
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
March 31, 2002 and the period from inception through March 31, 2002. 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.
Three Months
Ended Inception Through
3/31/02 3/31/02
------- --------
(Amounts in thousands, except per Unit amounts)
Distributable Cash Flow:
- -----------------------
Net Income on a GAAP basis $ 545 $ 185,687
Items not requiring (not providing) the use of
operating funds:
Amortization of prepaid fees and expenses - 17,822
Acquisition expenses paid from offering
proceeds charged to operations - 690
Shared Appreciation Income/prepayment premiums - (6,157)
Premium Amortization - 22
Gain on sale of MBS - (377)
--------- ----------
Total Distributable Cash Flow ("DCF") $ 545 $ 197,687
========= ==========
Limited Partners Share of DCF $ 528 $ 191,756
========= ==========
Limited Partners Share of DCF per Unit (14,655,512) $ .03 $ 13.08
========= ==========
General Partners Share of DCF $ 17 $ 5,931
========= ==========
Net Proceeds from Capital Transactions:
- --------------------------------------
Principal collections on PIMs and PIM sale proceeds
including Shared Appreciation Income/prepayment premiums $ 13 $ 174,393
Principal collections on MBS and MBS sale proceeds 933 100,309
Reinvestment of MBS and PIM principal collections
and sale proceeds - (41,966)
Gain on sale of MBS - 377
--------- ----------
Total Net Proceeds from Capital Transactions $ 946 $ 233,113
========= ==========
Cash available for distribution
(DCF plus proceeds from Capital Transactions) $ 1,491 $ 430,800
========= ==========
Distributions:
Limited Partners $ 733(a) $ 423,567(b)
========= ==========
Limited Partners Average per Unit $ .05(a) $ 28.90(b)(c)
========= ==========
General Partners $ 17(a) $ 5,931(b)
========= ==========
Total Distributions $ 750 $ 429,498
========= ==========
(a) Represents all distributions paid in 2002 except February 2002 quarterly
distribution and includes an estimate of the quarterly distribution to be
paid in May 2002.
(b) Includes an estimate of the quarterly distribution to be paid in May 2002.
(c) Limited Partners average per Unit return of capital as of March 2002 is
$15.82 [$28.90 - $13.08]. 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.