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 THEx SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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 of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (617) 423-2233 (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 March 31, December 31, 1997 1996 Participating Insured Mortgages ("PIMs") $151,402,766 $151,717,926 (Note 2) Mortgage-Backed Securities and multi-family insured mortgages("MBS") (Note 3) 40,496,162 41,283,769 Total mortgage investments 191,898,928 193,001,695 Cash and cash equivalents 7,884,697 7,921,270 Interest receivable and other assets 1,569,428 1,604,301 Prepaid acquisition fees and expenses, net of accumulated amortization of $8,611,252 and $8,279,914, respectively 3,557,625 3,888,963 Prepaid participation servicing fees, net of accumulated amortization of $2,734,688 and $2,629,406, respectively 1,030,908 1,136,190 Total assets $205,941,586 $207,552,419 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 4,239 $ 18,900 Partners' equity (deficit) (Note 5): Limited Partners 205,998,810 207,196,050 (14,655,512 Limited Partner interests outstanding) General Partners (235,639) (217,867) Unrealized gain on MBS 174,176 555,336 Total Partners' equity 205,937,347 207,533,519 Total liabilities and partners' equity $205,941,586 $207,552,419 The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Three Months Ended March 31, 1997 1996 Revenue: Interest income - PIMs: Base interest $3,003,629 $3,027,700 -2- Participation interest - 16,010 Interest income - MBS 804,591 865,955 Other interest income 103,520 89,104 Total revenue 3,911,740 3,998,769 Expenses: Asset management fee to an affiliate 355,452 365,418 Expense reimbursements to affiliates 34,541 58,835 Amortization of prepaid fees and expenses 436,620 436,619 General and administrative 88,938 52,981 Total expenses 915,551 913,853 Net income $2,996,189 $3,084,916 Allocation of net income (Note 5): Limited Partners $2,906,303 $2,992,369 Average net income per Limited Partner interest (14,655,512 Limited Partner interests outstanding) $ .20 $ .20 General Partners $ 89,886 $ 92,547 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, 1997 1996 Operating activities: Net income $2,996,189 $ 3,084,916 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of discounts on short-term investments - (4,902) Amortization of prepaid fees and expenses 436,620 436,619 Changes in assets and liabilities: Decrease in interest receivable and other assets 34,873 27,999 Decrease in liabilities (14,661) (9,399) Net cash provided by operating activities 3,453,021 3,535,233 Investing activities: Principal collections on PIMs 315,160 292,903 Principal collections on MBS 406,447 631,976 Maturity of short-term investment - 500,000 Short-term investment - (488,210) Net cash provided by investing activities 721,607 936,669 -3- Financing activity: Distributions (4,211,201) (4,209,465) Net increase(decrease) in cash and cash equivalents (36,573) 262,437 Cash and cash equivalents, beginning of period 7,921,270 5,963,681 Cash and cash equivalents, end of period $7,884,697 $ 6,226,118 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, 1996 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, 1997 and the results of operations and cash flows for the three months ended March 31, 1997 and 1996. The results of operations for the three months ended March 31, 1997 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, 1997, the Partnership's PIM portfolio has a fair value of $152,108,272 and gross unrealized gains and losses of $1,875,910 and $1,170,404, respectively. The Partnership's PIMs have maturities ranging from 2009 to 2031. 3. MBS At March 31, 1997, the Partnership's MBS portfolio has an amortized cost of $40,321,986 and gross unrealized gains and losses of $729,107 and $554,931, respectively. The Partnership's MBS have maturities ranging from 2007 to 2033. Continued -4- KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the three months ended March 31, 1997 is as follows: Total Limited General Unrealized Partners' Partners Partners Gain Equity Balance at December 31, 1996 $207,196,050 $(217,867) $ 555,336 $207,533,519 Net income 2,906,303 89,886 - 2,996,189 Distributions (4,103,543) (107,658) - (4,211,201) Decrease in unrealized gain on MBS - - (381,160) (381,160) Balance at March 31, 1997 $205,998,810 $(235,639) $ 174,176 $205,937,347 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 regular quarterly distributions paid to investors of approximately $4.2 million. Funds used for investor distributions are generated from interest income received on the PIMs, MBS, cash and short-term investments, and the principal collections received on the PIMs and MBS. The Partnership funds a portion of the distribution from principal collections causing the capital resources of the Partnership to continually decrease. As a result of this decrease, the total cash inflows to the Partnership will also decrease, which will result in periodic adjustments to the distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment to the distribution rate 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 of cash available for distribution. To the extent quarterly distributions differ from the cash available for distribution, the General Partners may adjust the distribution rate or distribute funds through a special distribution. Based on current projections, the General Partners believe the Partnership can maintain the current distribution rate for the -5- foreseeable future. However, in the event of PIM prepayments the Partnership would be required to distribute any proceeds from the prepayments as a special distribution which may cause an adjustment to the distribution rate to reflect the anticipated future cash inflows from the remaining mortgage investments. During the first quarter of 1996, the borrower of the Lily Flagg Apartments PIM approached the Partnership about a potential sale of the property and the prepayment of the PIM. Since then, the borrower has informed the General Partners that a sale most likely will not occur until 1998 but requested a discharge of the loan s participation feature to improve the marketability of the property. The General Partners have agreed in principal to the borrower s request in exchange for a full payment of all additional interest earned through the date of the discharge, which is expected to occur during the second quarter of 1997. For the first five years of the PIMs the borrowers are prohibited from prepaying. For the second five years, the borrowers can prepay the loans and pay the greater of a prepayment penalty or all participation interest. The Partnership has the option to call certain PIMs by accelerating their maturity if the loans are not prepaid by the tenth year after permanent funding. The Partnership 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, interest rates and available financing will have an impact on this decision. Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by the Government National Mortgage Association ( GNMA ), the Federal National Mortgage Association ( FNMA ), 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. FNMA 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 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. 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 in Section 17 of the Partnership Agreement, and the source of cash distributions for the three months ended March 31, 1997 and the period from inception to March 31, 1997. 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. (Amounts in thousands, except -6- per Unit amounts). Three Months Ended Inception to March 31, 1997 March 31, 1997 Distributable Cash Flow: Income for tax purposes $3,288 $156,945 Items not requiring (not providing) the use of operating funds: Amortization of prepaid expenses, fees and organization costs 145 8,165 Acquisition expenses paid from offering proceeds charged to operations - 690 Shared appreciation income/ prepayment - (2,001) penalties Gain on sale of MBS - (377) Total Distributable Cash Flow ("DCF") $3,433 $163,422 Limited Partners Share of DCF $3,330 $158,519 Limited Partners Share of DCF per Limited Partner interest ( Unit ) $ .23 $ 10.82 (b) General Partners Share of DCF $ 103 $ 4,903 Net Proceeds from Capital Transactions: Principal collections on PIMs and PIM sale proceeds including Shared Appreciation Income/ prepayment penalties $ 315 $ 48,228 Principal collections on MBS and MBS sale proceeds 406 62,274 Distributable Cash Flow and Net Cash Proceeds From Capital Transactions, Continued Reinvestment of MBS and PIM principal collections and sale proceeds - (41,966) Gain on sale of MBS - 377 Total Net Proceeds from Capital Transactions $ 721 $ 68,913 Cash available for distribution (DCF plus proceeds from Capital Transaction) $4,154 $232,335 Distributions: Limited Partners $4,104 (a) $222,200 (a) -7- Limited Partners Average per Unit $ .28 (a) $ 15.16 (a)(b) General Partners $ 103 (a) $ 4,903 (a) Total Distributions $4,207 $227,103 (a) Includes an estimate of the May 1997 distribution. (b) Limited Partners average per Unit return of capital as of May 1997 is $4.34 [$15.16 - $10.82]. 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. Operations The following discussion relates to the operation of the Partnership during the three months ended March 31, 1997 and 1996. (Amounts in thousands) 1997 1996 Interest income - PIMs: Base interest $3,004 $3,028 Participation interest - 16 Interest income on MBS 805 866 Other interest income 103 89 Partnership expenses (479) (477) Distributable Cash Flow 3,433 3,522 Amortization of prepaid fees and expenses (437) (437) Net income $2,996 $3,085 Net income decreased slightly during the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. Most of the decrease can be attributed to a reduction in the interest earned on MBS which is a result of prepayments and scheduled payments received on the MBS. The Partnership funds a portion of its distributions with MBS and PIM principal collections which reduces the invested assets generating income for the Partnership. As the invested assets decline so will interest income on MBS, base interest income on PIMs and other interest income. 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 Security Holders Response: None -8- 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 GeneralPartner. Date: April 23, 1997 -9-