UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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,
1999 1998
Participating Insured Mortgages ("PIMs") $ 42,044,172 $ 82,258,207
(Note 2)
Mortgage-Backed Securities and multi-family
insured mortgages ("MBS") (Note 3) 23,448,580 24,792,352
Total mortgage investments 65,492,752 107,050,559
Cash and cash equivalents 3,747,908 8,758,737
Interest receivable and other assets 456,211 730,829
Prepaid acquisition fees and expenses, net
of accumulated amortization of $ 3,452,699
and $6,024,495, respectively 317,060 889,863
Prepaid participation servicing fees, net of
accumulated amortization of $ 1,022,232 and
$ 1,876,746, respectively 42,832 196,774
Total assets $ 70,056,763 $ 117,626,762
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 9,000 $ 252,769
Partners' equity (deficit) (Note 4):
Limited Partners 70,012,366 117,123,621
(14,655,512 Limited Partner
interests outstanding)
General Partners (348,327) (290,140)
Accumulated comprehensive income 383,724 540,512
Total Partners' equity 70,047,763 117,373,993
Total liabilities and Partners' equity $ 70,056,763 $ 117,626,762
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,
1999 1998 1999 1998
Revenues:
Interest income - PIMs:
Basic interest $ 910,281 $ 1,872,864 $ 1,988,034 $ 4,114,931
Participation interest 60,076 1,018,517 60,076 2,148,257
Interest income - MBS 459,653 1,021,379 939,130 1,871,304
Other interest income 110,254 369,565 322,466 576,500
Total revenues 1,540,264 4,282,325 3,309,706 8,710,992
Expenses:
Asset management fee to an
affiliate 129,734 251,499 274,200 539,996
Expense reimbursements to
affiliates 29,265 (33,980) 35,630 8,596
Amortization of prepaid
fees and expenses 316,991 861,467 726,745 1,288,676
General and administrative 54,121 85,402 75,952 135,181
Total expenses 530,111 1,164,388 1,112,527 1,972,449
Net income 1,010,153 3,117,937 2,197,179 6,738,543
Other comprehensive income:
Net change in unrealized gain
on MBS (238,617) (334,005) (156,788) (392,367)
Total comprehensive income $ 771,536 $ 2,783,932 $ 2,040,391 $ 6,346,176
Allocation of net income
(Note 4):
Limited Partners $ 979,849 $ 3,024,399 $ 2,131,264 $ 6,536,387
Average net income per
Limited Partner interest
(14,655,512 Limited Partner
interests outstanding) $ .07 $ .21 $ .15 $ .45
General Partners $ 30,304 $ 93,538 $ 65,915 $ 202,156
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,
1999 1998
Operating activities:
Net income $ 2,197,179 $ 6,738,543
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of prepaid fees and expenses 726,745 1,288,676
Shared appreciation income and prepayment premiums (60,076) (1,247,726)
Changes in assets and liabilities:
Decrease in interest receivable and
other assets 274,618 230,420
Decrease in liabilities (243,769) (6,791)
Net cash provided by operating activities 2,894,697 7,003,122
Investing activities:
Principal collections on PIMs including a prepayment premium
of $60,076 in 1999 and shared appreciation income and
prepayment premiums of $1,229,426 in 1998 40,274,111 33,629,016
Principal collections on MBS including a
prepayment premium of $18,300 in 1998 1,186,984 5,752,011
Net cash provided by investing activities 41,461,095 39,381,027
Financing activities:
Special distributions (41,035,433) (13,776,181)
Quarterly distributions (8,331,188) (8,426,091)
Net cash used for financing activities (49,366,621) (22,202,272)
Net (decrease) increase in cash and cash equivalents (5,010,829) 24,181,877
Cash and cash equivalents, beginning of period 8,758,737 9,052,480
Cash and cash equivalents, end of period $ 3,747,908 $ 33,234,357
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, 1998 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, 1999, its results of operations for the three
and six months ended June 30, 1999 and 1998 and its cash flows for the six
months ended June 30, 1999 and 1998.
The results of operations for the three and six months ended June 30, 1999
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
In January 1999, the Partnership received prepayments of the Stanford
Court, Hillside Court, Carlyle Court and Waterford Court Apartment PIMs in the
amounts of $6,609,242, $4,266,759, $7,696,897 and $9,394,386, respectively. In
addition to the prepayments, the Partnership received $860,052 of Shared
Appreciation Interest and prepayment premiums and $432,877 of Minimum Additional
Interest and Shared Income Interest during December 1998. On February 26, 1999,
the Partnership made a special distribution of the capital transaction proceeds
to the Limited Partners of $1.97 per Limited Partner interest.
In May 1999, the Partnership received a prepayment of the Country Meadows
PIM in the amount of $12,015,224 plus a $60,076 prepayment premium. On June 18,
1999, the Partnership made a special distribution of $.83 per Limited Partner
interest with the capital transaction proceeds.
At June 30, 1999, the Partnership's PIM portfolio has a fair value of
$43,128,778 and gross unrealized gains of $1,084,606. The Partnership's PIMs
have maturities ranging from 2023 to 2030.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. MBS
At June 30, 1999, the Partnership's MBS portfolio has an amortized cost of
$ 23,064,856 and gross unrealized gains and losses of $410,807 and $27,083,
respectively. The Partnership's MBS have maturities ranging from 2007 to 2030.
At June 30, 1999 the Partnership's insured mortgage loan was not delinquent with
respect to principal or interest payments.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended
June 30, 1999 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
Balance at December 31, 1998 $ 117,123,621 $ (290,140) $ 540,512 $ 117,373,993
Net income 2,131,264 65,915 - 2,197,179
Quarterly distributions (8,207,086) (124,102) - (8,331,188)
Special distributions (41,035,433) - - (41,035,433)
Change in unrealized gain
on MBS - - (156,788) (156,788)
Balance at June 30, 1999 $ 70,012,366 $ (348,327) $ 383,724 $ 70,047,763
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.
The General Partners of the Partnership have conducted an assessment of the
Partnership's core internal and external computer information systems and have
taken the further necessary steps to understand the nature and extent of the
work required to make its systems Year 2000 ready in those situations in which
it is required to do so. The Year 2000 readiness issue concerns the inability of
computerized information systems to accurately calculate, store or use a date
after 1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations.
In this regard, the General Partners of the Partnership, along with certain
affiliates, began a computer systems project in 1997 to significantly upgrade
its existing hardware and software. The General Partners completed the testing
and conversion of the financial accounting operating systems in February 1998.
As a result, the General Partners have generated operating efficiencies and
believe their financial accounting operating systems are Year 2000 ready. The
General Partners of the Partnership incurred hardware costs as well as
consulting and other expenses related to the infrastructure and facilities
enhancements necessary to complete the upgrade and prepare for the Year 2000.
There are no other significant internal systems or software that the Partnership
is using at the present time.
The General Partners of the Partnership surveyed the Partnership's material
third-party service providers (including but not limited to its banks and
telecommunications providers) and significant vendors and received assurances
that such service providers and vendors are Year 2000 ready. The Partnership
does not anticipate any problems with such providers or vendors that would
materially impact its results of operations, liquidity or capital resources.
Nevertheless the General Partners are developing contingency plans for all of
their "mission-critical functions" to insure business continuity.
The Partnership is also subject to external forces that might generally
affect industry and commerce, such as utility and transportation company Year
2000 readiness failures and related service interruptions. However, the General
Partners do not anticipate any material impact to the Partnership's results of
operations, liquidity and capital resources.
To date, the Partnership has not incurred any cost associated with being
Year 2000 ready. All costs have been incurred by the General Partners and it is
estimated that any future Year 2000 readiness costs will be borne by the General
Partners. No estimate can be made at this time as to the impact of the readiness
of such third parties.
Liquidity and Capital Resources
The most significant demands on the Partnership's liquidity are regular
quarterly distributions paid to investors of approximately $1.5 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 downward adjustments to the distributions paid to investors.
On February 26, 1999 the Partnership made a special distribution to the
Limited Partners of $1.97 per Limited Partner Interest. This special
distribution was the result of the prepayment of the Stanford Court, Hillside
Court, Carlyle Court and Waterford Court Apartment PIMs. The Partnership
received principal of $27,967,284, Shared Appreciation Income and prepayment
premiums of $860,052, and Minimum Additional and Shared Income Interest of
$432,877 from these prepayments.
On June 18, 1999, the Partnership made a special distribution of $.83 per
Limited Partner interest with the proceeds of the Country Meadows PIM. The
Partnership received principal of $ 12,015,224 and a prepayment premium of $
60,076 from this prepayment.
As a result of the significant prepayment activity during 1998 and the
first six months of 1999, the Partnership is no longer able to pay the quarterly
distribution at the rate of $.28 per Limited Partner interest per quarter. The
General Partners have set a rate of $.10 per Limited Partner interest per
quarter, effective with the August 1999 distribution. 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.
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), 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 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.
Operations
The following discussion relates to the operation of the Partnership during
the three and six months ended June 30, 1999 and 1998.
Net income decreased for the three and six months ended June 30, 1999 as
compared to the corresponding periods in 1998 by approximately $2,108,000 and
$4,541,000, respectively, due primarily to lower interest income on PIMs and
MBS, net of decreases in asset management fees and amortization expense
resulting from prepayments. The reduction in basic interest on PIMs is due to
the payoff of Carlyle Court, Hillside Court, Stanford Court and Waterford Court
in January 1999, Country Meadows in May 1999, and Westbrook Manor, Fallwood,
Greenbrier, Harbor House, Walden Village and Longwood Villas during 1998. The
reduction in participation interest on PIMs is due to receiving significant
participation interest during the first half of 1998 from the payoffs of the
Westbrook Manor, Fallwood, Greenbrier, Harbor House and Longwood Villas PIMs and
the Brookside insured mortgage. The reduction in interest income on MBS is due
primarily to the payoff of the Lily Flagg and Brookside multi-family MBS during
1998 along with continuing prepayments on the Partnership's single-family MBS.
Asset management fees decreased during the three and six months ended June
30, 1999 as compared to the corresponding periods in 1998 due to the significant
prepayments in 1998 and 1999. Amortization expense was higher in the second
quarter and first half of 1998 as compared to the corresponding periods in 1999
due primarily to fully amortizing the remaining prepaid fees and expenses of the
PIMs that paid off.
Interest income on PIMs and MBS will continue to decline as principal
collections reduce the outstanding balance of the portfolios. 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.
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
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, 1999