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 SECURITIESx EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 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, 1998 1997 Participating Insured Mortgages ("PIMs") $108,261,010 $122,048,053 (Note 2) Mortgage-Backed Securities ("MBS") (Note 3) 44,053,545 44,727,693 Total mortgage investments 152,314,555 166,775,746 Cash and cash equivalents 9,632,212 9,052,480 Interest receivable and other assets 1,063,057 1,180,660 Prepaid acquisition fees and expenses, net of accumulated amortization of $7,660,722 and $8,293,080, respectively 2,150,454 2,481,160 Prepaid participation servicing fees, net of accumulated amortization of $2,159,563 and $2,707,314, respectively 540,428 636,931 Total assets $165,700,706 $180,126,977 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 28,599 $ 25,588 Partners' equity (deficit) (Note 5): Limited Partners 164,229,748 178,597,484 (14,655,512 Limited Partner interests outstanding) General Partners (268,499) (265,315) Unrealized gain on MBS 1,710,858 1,769,220 Total Partners' equity 165,672,107 180,101,389 Total liabilities and partners' equity $165,700,706 $180,126,977 The accompanying notes are an integral part of the financial statements. -3- KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Three Months Ended March 31, 1998 1997 Revenue: Interest income - PIMs: Base interest $2,242,067 $3,003,629 Additional interest 1,129,740 - Interest income - MBS 849,925 804,591 Other Interest income 206,935 103,520 Total revenue 4,428,667 3,911,740 Expenses: Asset management fee to an affiliate 288,497 355,452 Expense reimbursements to affiliates 42,576 34,541 Amortization of prepaid fees and expenses 427,209 436,620 General and administrative 49,779 88,938 Total expenses 808,061 915,551 Net income $3,620,606 $2,996,189 Allocation of net income (Note 5): Limited Partners $3,511,988 $2,906,303 Average net income per Limited Partner interest (14,655,512 Limited Partner interests outstanding) $ .24 $ .20 General Partners $ 108,618 $ 89,886 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, 1998 1997 Operating activities: Net income $3,620,606 $2,996,189 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 427,209 436,620 Shared Appreciation Interest and prepayment penalty (474,426) - Changes in assets and liabilities: Decrease in interest receivable and other assets 117,603 34,873 Increase (decrease) in liabilities 3,011 (14,661) Net cash provided by operating activities 3,694,003 3,453,021 Investing activities: Principal collections on PIMs including Shared Appreciation Interest and prepayment penalty income of $474,426 in 1998 14,261,469 315,160 Principal collections on MBS 615,786 406,447 Net cash provided by investing activities 14,877,255 721,607 Financing activity: Quarterly Distributions (4,215,345) (4,211,201) Special Distributions (13,776,181) - Net cash used for financing activities (17,991,526) (4,211,201) Net increase (decrease) in cash and cash equivalents 579,732 (36,573) Cash and cash equivalents, beginning of period 9,052,480 7,921,270 Cash and cash equivalents, end of period $ 9,632,212 $7,884,697 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, 1997 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, 1998 and the results of operations and cash flows for the three months ended March 31, 1998 and 1997. -6- The results of operations for the three months ended March 31, 1998 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 the first quarter of 1998, the Partnership received prepayments of the Westbrook Manor, Fallwood and Greenbrier Apartment PIMs in the amounts of $4,841,446, $6,505,922, and $2,196,031, respectively. In addition to the prepayments, the Partnership received $411,810 of Shared Appreciation Interest and $637,002 of Minimum Additional Interest and Shared Income Interest. On March 27, 1998, the Partnership made a special distribution to the investors of $.94 per Limited Partner interest. During March 1998, the Partnership received a prepayment penalty of $62,616 and Minimum Additional and Shared Income Interest of $18,312 relating to the Longwood Villas PIM, with a corresponding prepayment of the mortgage in the amount of $6,261,587 being received on April 15, 1998. The Partnership will pay a special distribution of $.43 per Limited Partner Interest in the second quarter of 1998. At March 31, 1998, the Partnership's PIM portfolio has a fair value of $109,101,603 and gross unrealized gains of $840,593. The Partnership's PIMs have maturities ranging from 2009 to 2031. 3. MBS At March 31, 1998, the Partnership's MBS portfolio has an amortized cost of $42,342,687 and gross unrealized gains of $1,710,858. The Partnership's MBS have maturities ranging from 2007 to 2033. Continued 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, 1998 is as follows: Total Limited General Unrealized Partners' Partners Partners Gain Equity Balance at December 31,1997 $178,597,484 $(265,315)$ 1,769,220 $180,101,389 Net income 3,511,988 108,618 - 3,620,606 Quarterly distributions (4,103,543) (111,802) - (4,215,345) Special distributions (13,776,181) - - (13,776,181) Decrease in unrealized gain on MBS - - (58,362) (58,362) Balance at March 31, 1998 $164,229,748 $(268,499) $1,710,858 $165,672,107 -8- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Managements 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. During the first quarter of 1998,the Partnership received prepayments of the Westbrook Manor, Fallwood and Greenbrier Apartment PIMs along with Additional Interest. On March 27, 1998,the Partnership made a special distribution to the investors of $.94 per Limited Partner interest. During March 1998,the Partnership received Additional Interest relating to the Longwood Villas PIM, with a corresponding prepayment of the mortgage being received on April 15, 1998. The Partnership will pay a special distribution of $.43 per Limited Partner Interest in the second quarter of 1998. The General Partners have been informed that the first mortgage loan on Lily Flagg may be prepaid during the second quarter 1998. When the transaction takes place, the Partnership will receive a 1% prepayment penalty. Upon receipt the Partnership will distribute the repayment proceeds and the prepayment penalty to the Limited Partners. Based on current projections,the General Partners believe the Partnership can maintain the current distribution rate for the foreseeable future. However, in the event of additional 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. -9- 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. The Partnership includes in cash and cash equivalents approximately $9 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. Operations The following discussion relates to the operations of the Partnership during the three months ended March 31, 1998 and 1997. Net income increased approximately $624,000 for the three months ended March 31, 1998 as compared to the same period in 1997. The increase is primarily attributed to Additional Interest related to the prepayment of Westbrook Manor, Fallwood, Greenbrier Apartment and Longwood Villas PIMs in the amount of $1,129,740 ($655,314 was Minimum Additional Interest and Shared Income Interest while $474,426 was Shared Appreciation Interest). In addition, other interest income significantly increased due to the Partnership having higher average short-term investment balances during the first quarter of 1998 as compared to the same period in 1997.These increases were somewhat offset by a decline in PIM interest income resulting from the prepayments of the Colonial, Lakeside and Pine Ridge Apartment PIMs in 1997 and Westbrook Manor, Fallwood and Greenbriar Apartment PIMs in 1998. In addition, the decrease in base interest on PIMs and the increase in interest on MBS was due to a transaction in 1997 involving the Lily Flagg PIM. The Partnership converted its investment from a PIM into a multi-family insured mortgage during third quarter of 1997. The Partnership funds a portion of 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. -11- 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 Item 5. Other information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None -12- 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: April 23, 1998 -13-