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, 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
September 30, December 31,
2000 1999
Participating Insured Mortgages ("PIMs")(Note 2) $ 17,605,689 $ 26,224,388
Mortgage-Backed Securities and
insured mortgage ("MBS") (Note 3) 21,366,541 22,277,956
Total mortgage investments 38,972,230 48,502,344
Cash and cash equivalents 3,580,362 11,093,183
Interest receivable and other assets 193,771 378,286
Prepaid acquisition fees and expenses, net
of accumulated amortization of $711,604
and $1,203,575, respectively 87,874 179,095
Prepaid participation servicing fees, net of
accumulated amortization of $0 and
$200,032, respectively - 9,085
Total assets $ 42,834,237 $ 60,161,993
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 14,661 $ 19,948
Partners' equity (deficit) (Note 4):
Limited Partners 43,073,876 60,360,347
(14,655,512 Limited Partner
interests outstanding)
General Partners (342,778) (323,383)
Accumulated comprehensive income 88,478 105,081
Total Partners' equity 42,819,576 60,142,045
Total liabilities and Partners' equity $ 42,834,237 $ 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 Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
Revenues:
Interest income - PIMs:
Basic interest $ 324,571 $ 1,105,078 $ 1,036,848 $ 3,093,112
Participation interest - 1,575,288 - 1,635,364
Interest income - MBS 417,212 448,390 1,273,333 1,387,520
Other interest income 64,170 51,951 269,072 374,417
Total revenues 805,953 3,180,707 2,579,253 6,490,413
Expenses:
Asset management fee to an
affiliate 73,702 122,529 226,895 396,729
Expense reimbursements to
affiliates 32,694 29,264 92,515 64,894
Amortization of prepaid
fees and expenses 21,968 123,689 100,306 850,434
General and administrative 78,249 75,179 188,146 151,131
Total expenses 206,613 350,661 607,862 1,463,188
Net income 599,340 2,830,046 1,971,391 5,027,225
Other comprehensive income:
Net change in unrealized gain
on MBS 29,729 (207,350) (16,603) (364,138)
Total comprehensive income $ 629,069 $ 2,622,696 $ 1,954,788 $ 4,663,087
Allocation of net income (Note 4):
Limited Partners $ 581,360 $ 2,745,144 $ 1,912,249 $ 4,876,408
Average net income per
Limited Partner interest
(14,655,512 Limited Partner
interests outstanding) $ .04 $ .18 $ .13 $ .33
General Partners $ 17,980 $ 84,902 $ 59,142 $ 150,817
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,
2000 1999
Operating activities:
Net income $ 1,971,391 $ 5,027,225
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of prepaid fees and expenses 100,306 850,434
Shared Appreciation Interest and prepayment premiums - (1,162,777)
Changes in assets and liabilities:
Decrease in interest receivable and
other assets 184,515 283,875
Decrease in liabilities (5,287) (239,270)
Net cash provided by operating activities 2,250,925 4,759,487
Investing activities:
Principal collections on PIMs including Shared Appreciation
Interest and prepayment premiums of $1,162,777 in 1999 8,618,699 41,483,278
Principal collections on MBS 894,812 1,722,559
Net cash provided by investing activities 9,513,511 43,205,837
Financing activities:
Special distributions (14,802,066) (41,035,433)
Quarterly distributions (4,475,191) (9,834,752)
Net cash used for financing activities (19,277,257) (50,870,185)
Net decrease in cash and cash equivalents (7,512,821) (2,904,861)
Cash and cash equivalents, beginning of period 11,093,183 8,758,737
Cash and cash equivalents, end of period $ 3,580,362 $ 5,853,876
Non cash activities:
Decrease in Fair Value of MBS $ (16,603) $ (364,138)
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 September 30, 2000, its results of operations for the
three and nine months ended September 30, 2000 and 1999 and its cash flows for
the nine months ended September 30, 2000 and 1999.
The results of operations for the three and nine months ended September 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
At September 30, 2000, the Partnership's two remaining PIMs have a fair market
value of $17,651,957 and gross unrealized gains of $46,268. The Partnership's
PIMs have maturities ranging from 2023 to 2024.
On March 30, 2000, the Partnership paid a special distribution of $.58 per
Limited Partner interest from the prepayment proceeds received during February
2000 on the Greenhouse Apartments PIM in the amount of $8,428,984. 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
received in December 1999 in the amount of $6,204,960. The underlying property
value had not increased sufficiently enough to meet the criteria for the
Partnership to earn any participation income.
3. MBS
At September 30, 2000, the Partnership's MBS portfolio has an amortized cost of
$9,600,624 and gross unrealized gains and losses of $207,836 and $119,358,
respectively. The Partnership's MBS have maturities ranging from 2007 to 2030.
At September 30, 2000 the Partnership's insured mortgage had an amortized cost
of $11,677,439.
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, 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 1,912,249 59,142 - 1,971,391
Quarterly distributions (4,396,654) (78,537) - (4,475,191)
Special distributions (14,802,066) - - (14,802,066)
Change in unrealized gain
on MBS - - (16,603) (16,603)
Balance at September 30, 2000 $ 43,073,876 $ (342,778) $ 88,478 $ 42,819,576
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 Partnerships 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 $.10 per Limited
Partner interest per quarter.
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 during February
2000 on the Greenhouse Apartments PIM in the amount of $8,428,984. 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
received in December 1999 in the amount of $6,204,960. 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 nine months ended September 30, 2000 and 1999.
Net Income decreased by $2,231,000 during the three months ended September 30,
2000, compared to the same period in 1999. The decrease was primarily due to a
decrease in PIM Basic and Participation interest which resulted from the payoffs
of the Saratoga, Le Coeur Du Monde, and Greenhouse PIMs.
Net Income decreased by $3,056,000 during the nine months ended September 30,
2000, compared to the same period in 1999. The decrease was primarily due to a
decrease in PIM Basic and Participation interest which resulted from the payoffs
of the Hillside Court, Carlyle Court, Waterford Court, and Stanford Court and
Country Meadows PIMs, along with the PIMs mentioned above. Amortization of
prepaid fees and expenses decreased due to accelerating the amortization of the
costs related to the PIMs which paid off.
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, 2000 the Partnership includes in cash and cash equivalents
approximately $3.3 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 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
September 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: November 3, 2000