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, 2000 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 (IRS employer identification no.) of incorporation or organization) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (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, 2000 1999 Participating Insured Mortgages ("PIMs") $ 17,668,543 $ 26,224,388 (Note 2) Mortgage-Backed Securities and insured mortgage ("MBS") (Note 3) 21,637,168 22,277,956 Total mortgage investments 39,305,711 48,502,344 Cash and cash equivalents 4,071,122 11,093,183 Interest receivable and other assets 197,738 378,286 Prepaid acquisition fees and expenses, net of accumulated amortization of $689,635 and $1,203,575, respectively 109,842 179,095 Prepaid participation servicing fees, net of accumulated amortization of $0 and $200,032, respectively - 9,085 Total assets $ 43,684,413 $ 60,161,993 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 9,774 $ 19,948 Partners' equity (deficit) (Note 4): Limited Partners 43,958,068 60,360,347 (14,655,512 Limited Partner interests outstanding) General Partners (342,178) (323,383) Accumulated comprehensive income 58,749 105,081 Total Partners' equity 43,674,639 60,142,045 Total liabilities and Partners' equity $ 43,684,413 $ 60,161,993 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, 2000 1999 2000 1999 Revenues: Interest income - PIMs: Basic interest $ 325,722 $ 910,281 $ 712,277 $ 1,988,034 Participation interest - 60,076 - 60,076 Interest income - MBS 427,961 459,653 856,121 939,130 Other interest income 68,376 110,254 204,902 322,466 Total revenues 822,059 1,540,264 1,773,300 3,309,706 Expenses: Asset management fee to an affiliate 73,551 129,734 153,193 274,200 Expense reimbursements to affiliates 32,694 29,265 59,821 35,630 Amortization of prepaid fees and expenses 21,968 316,991 78,338 726,745 General and administrative 96,489 54,121 109,897 75,952 Total expenses 224,702 530,111 401,249 1,112,527 Net income 597,357 1,010,153 1,372,051 2,197,179 Other comprehensive income: Net change in unrealized gain on MBS (13,188) (238,617) (46,332) (156,788) Total comprehensive income $ 584,169 $ 771,536 $ 1,325,719 $ 2,040,391 Allocation of net income (Note 4): Limited Partners $ 579,436 $ 979,849 $ 1,330,889 $ 2,131,264 Average net income per Limited Partner interest (14,655,512 Limited Partner interests outstanding) $ .04 $ .07 $ .09 $ .15 General Partners $ 17,921 $ 30,304 $ 41,162 $ 65,915 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, 2000 1999 Operating activities: Net income $ 1,372,051 $ 2,197,179 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 78,338 726,745 Prepayment premium - (60,076) Changes in assets and liabilities: Decrease in interest receivable and other assets 180,548 274,618 Decrease in liabilities (10,174) (243,769) Net cash provided by operating activities 1,620,763 2,894,697 Investing activities: Principal collections on PIMs including a prepayment premium of $60,076 in 1999 8,555,845 40,274,111 Principal collections on MBS 594,456 1,186,984 Net cash provided by investing activities 9,150,301 41,461,095 Financing activities: Special distributions (14,802,066) (41,035,433) Quarterly distributions (2,991,059) (8,331,188) Net cash used for financing activities (17,793,125) (49,366,621) Net decrease in cash and cash equivalents (7,022,061) (5,010,829) Cash and cash equivalents, beginning of period 11,093,183 8,758,737 Cash and cash equivalents, end of period $ 4,071,122 $ 3,747,908 Non cash activities: Decrease in Fair Value of MBS $ (46,332) $ (156,788) 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, 1999 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, 2000, its results of operations for the three and six months ended June 30, 2000 and 1999 and its cash flows for the six months ended June 30, 2000 and 1999. The results of operations for the three and six months ended June 30, 2000 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 On March 30, 2000, the Partnership paid a special distribution of $.58 per Limited Partner interest from the prepayment proceeds received on the Greenhouse Apartments PIM in the amount of $8,428,984 during February 2000. The underlying property was foreclosed on by the first mortgage lender during January 1999. The Partnership continued to receive its full principal and basic interest payments due on the PIM while the underlying mortgage was in default because those payments were guaranteed by GNMA. The Partnership did not receive any participation income from this transaction. On January 11, 2000, the Partnership paid a special distribution of $.43 per Limited Partner interest from the Saratoga Apartment PIM prepayment proceeds in the amount of $6,204,960, received in December 1999. The underlying property value had not increased sufficiently enough to meet the criteria for the Partnership to earn any participation income. At June 30, 2000, the Partnership's two remaining PIMs have a fair market value of $17,560,945 and gross unrealized gains and losses of $7,929 and $115,527, respectively. The Partnership's PIMs have maturities ranging from 2023 to 2024. 3. MBS At June 30, 2000, the Partnership's MBS portfolio has an amortized cost of $9,871,701 and gross unrealized gains and losses of $209,910 and $151,161, respectively. The Partnership's MBS have maturities ranging from 2007 to 2030. At June 30, 2000 the Partnership's insured mortgage had an amortized cost of $11,706,718. 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 six months ended June 30, 2000 is as follows: Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity Balance at December 31, 1999 $ 60,360,347 $ (323,383) $ 105,081 $ 60,142,045 Net income 1,330,889 41,162 - 1,372,051 Quarterly distributions (2,931,102) (59,957) - (2,991,059) Special distributions (14,802,066) - - (14,802,066) Change in unrealized gain on MBS - - (46,332) (46,332) Balance at June 30, 2000 $ 43,958,068 $ (342,178) $ 58,749 $ 43,674,639 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. 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. At this time the General Partners have determined that the Partnership can maintain its current distribution rate of $.40 per Limited Partner interest per year. In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investments also may provide additional income through its participation feature in the underlying properties if they operate 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 properties are 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. On March 30, 2000, the Partnership paid a special distribution of $.58 per Limited Partner interest from the prepayment proceeds received on the Greenhouse Apartments PIM in the amount of $8,428,984 during February 2000. The underlying property was foreclosed on by the first mortgage lender during January 1999. The Partnership continued to receive its full principal and basic interest payments due on the PIM while the underlying mortgage was in default because those payments were guaranteed by GNMA. The Partnership did not receive any participation income from this transaction. On January 11, 2000, the Partnership paid a special distribution of $.43 per Limited Partner interest from the Saratoga Apartment PIM prepayment proceeds in the amount of $6,204,960, received in December 1999. The underlying property value had not increased sufficiently enough to meet the criteria for the Partnership to earn any participation income. The Partnership's only remaining PIM investments are the GNMA securities backed by the first mortgage loans on Denrich Apartments and Richmond Park. Both properties are thirty years old, and as they have 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 lead to extensive deferred maintenance. Denrich Apartments operates under a long term workout agreement with the Partnership that expires at the end of 2000. The General Partners anticipate the workout will be renegotiated and extended under similar terms. Richmond Park maintains its position in the stable, older Cleveland suburb where it is located. Occupancy generally hovers in the low 90% range, but because the neighborhood does not support significant rental rate increases, the property only generates sufficient cash flow for adequate maintenance and not enough to provide for major capital improvements. Based on these conditions, the General Partners do not expect the Partnership will receive significant participation income from the operations of either of the remaining PIM investments. During the first five years, borrowers are prohibited from prepaying the first mortgage loans underlying the PIMs. During the second five years, borrowers may prepay the loans by incurring a prepayment penalty. The Partnership has the option to call certain PIMs by accelerating their maturity if they are not prepaid by the tenth year after permanent funding. The General Partners 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, the interest-rate environment and availability of financing will affect those decisions. Results of Operations The following discussion relates to the operation of the Partnership during the three and six months ended June 30, 2000 and 1999. Net income decreased by $413,000 during the three months ended June 30, 2000 when compared to the same period in 1999. This decrease was primarily due to a decrease in PIM basic interest that resulted from the payoffs of the Greenhouse, Saratoga, Le Coeur du Monde and Country Meadows PIMs. Net income decreased by $825,000 during the six months ended June 30, 2000 when compared to the same period in 1999. This decrease was primarily due to a decrease in PIM basic interest that resulted from the payoffs of the Stanford Court, Hillside Court, Carlyle Court, Waterford Court PIMs along with those mentioned above. 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, 2000 the Partnership includes in cash and cash equivalents approximately $3.6 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 June 30, 2000, 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 PIMs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they mature. 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 5, 2000