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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-16817
Krupp Insured Plus-II Limited Partnership
(Exact name of registrant as specified in its charter)
Massachusetts 04-2955007
(State or other jurisdiction of (IRS Employe Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of
Depositary Receipts representing Units of Limited Partner Interests.
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
Aggregate market value of voting securities held by non-affiliates:
Not applicable, as securities are non-voting.
Documents incorporated by reference: See Part IV, Item 14
The exhibit index is located on pages 10-11.
PART I
This form 10-K 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.
ITEM 1. BUSINESS
Krupp Insured Plus-II Limited Partnership (the "Partnership") is a
Massachusetts limited partnership which was formed on October 29, 1986. The
Partnership raised approximately $292 million through a public offering of
limited partner interests evidenced by units of depositary receipts
("Units") and used the investable proceeds primarily to acquire
participating insured mortgages ("PIMs") and mortgage-backed securities
("MBS"). The Partnership considers itself to be engaged only in the
industry segment of investment in mortgages.
The Partnership's investments in PIMs on multi-family residential
properties consist of a MBS (the "insured mortgage") guaranteed as to
principal and basic interest. These insured mortgages were issued or
originated under or in connection with the housing program of the
Government National Mortgage Association ("GNMA"). PIMs provide the
Partnership with monthly payments of principal and basic interest and also
provide for Partnership participation in the current revenue stream and in
residual value, if any, from a sale or other realization of the underlying
property. The borrower conveys these rights to the Partnership through a
subordinated promissory note and mortgage. The participation features are
neither insured nor guaranteed.
The Partnership also acquired MBS and insured mortgages collateralized by
single-family or multi-family mortgage loans issued or originated by GNMA,
Fannie Mae, HUD or the Federal Home Loan Mortgage Corporation ("FHLMC").
Fannie Mae and FHLMC guarantee the principal and basic interest of the
Fannie Mae and FHLMC MBS, respectively. GNMA guarantees the timely payment
of principal and basic interest on its MBS, and HUD insures the pooled
mortgage loans underlying the GNMA MBS and its own direct mortgage loans.
Although the Partnership will terminate no later than December 31, 2026 it
is expected that the value of the PIMs generally will be realized by the
Partnership through repayment or sale as early as ten years from the dates
of the closings of the permanent loans and that the Partnership will
realize the value of all of its other investments within that time frame
thereby resulting in a dissolution of the Partnership significantly prior
to December 31, 2026.
The Partnership's investments are not expected to be subject to seasonal
fluctuations. Any ultimate realization of the participation features of the
PIMs are subject to similar risks associated with equity real estate
investments, including: reliance on the owner's operating skills, ability
to maintain occupancy levels, control operating expenses, maintain the
properties and provide adequate insurance coverage; adverse changes in
general economic conditions, adverse local conditions, and changes in
governmental regulations, real estate zoning laws, or tax laws; and other
circumstances over which the Partnership may have little or no control.
The requirements for compliance with federal, state and local regulations
to date have not had an adverse effect on the Partnership's operations, and
no adverse effect is anticipated in the future.
As of December 31, 1999, there were no personnel directly employed by the
Partnership.
ITEM 2. PROPERTIES
None
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Partnership is
a party or to which any of its investments is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There currently is no established trading market for the Units.
The number of investors holding Units as of December 31, 1999 was
approximately 13,200. One of the objectives of the Partnership is to
provide quarterly distributions of cash flow generated by its investments
in mortgages. The Partnership anticipates that future operations will
continue to generate cash available for distribution. Adjustments may be
made to the distribution rate in the future due to realization and payout
of the existing mortgages.
During 1999, the Partnership made special distributions consisting
primarily of principal proceeds from the Stanford Court, Hillside Court,
Carlyle Court, Waterford Court, Country Meadows and Le Coeur du Monde PIM
prepayments. The Partnership may make special distributions in the future
if PIMS prepay or a sufficient amount of cash is available from MBS and PIM
principal collections. On January 11, 2000, the Partnership paid a special
distribution of $.43 per Unit from the Saratoga Apartments prepayment that
occurred in December 1999. The Partnership anticipates making a special
distribution of $.58 per Unit in March 2000 due to the Greenhouse
Apartments PIM prepayment that occurred in February 2000.
During 1998, the Partnership made special distributions consisting
primarily of principal proceeds from the Walden Village, Longwood Villas,
Harbor House, Westbrook Manor, Fallwood and Greenbrier PIM prepayments and
the repayment of the Brookside and Lily Flagg multi-family MBS's.
The Partnership made the following distributions, to its Partners during
the two years ended December 31, 1999 and 1998:
1999 1998
Amount Per Unit Amount Per Unit
Distributions:
Limited Partners $ 11,138,189 $ .76 $ 16,414,173 $1.12
General Partners 217,645 385,355
11,355,834 16,799,528
Special Distributions:
Limited Partners 51,587,401 $3.52 56,716,830 $3.87
Total Distributions $ 62,943,235 $ 73,516,358
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Partnership's financial position and operating results. This information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements
and Supplementary Data, which are included in Item 7 and Item 8, (Appendix
A) of this report, respectively.
1999 1998 1997 1996 1995
Total revenues $ 7,822,665 $15,335,618 $16,672,558 $15,855,280 $16,366,468
Net income 6,146,718 12,017,670 12,972,600 12,331,212 12,656,200
Net income allocated to:
Limited Partners 5,962,316 11,657,140 12,583,422 11,961,276 12,276,514
Average per Unit .41 .80 .86 .82 .84
General Partners 184,402 360,530 389,178 369,936 379,686
Total assets at
December 31 60,161,993 117,626,762 180,126,977 207,552,419 212,789,466
Distributions to:
Limited Partners 11,138,189 16,414,173 16,414,173 16,414,171 16,414,173
Average per Unit .76 1.12 1.12 1.12 1.12
Special 51,587,401 56,716,830 24,767,815 - -
Average per Unit 3.52 3.87 1.69 - -
General Partners 217,645 385,355 436,626 432,214 430,359
ITEM 7. 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.
Impact of the Year 2000 Issue
Starting in 1997 the General Partners conducted an assessment of the
Partnership's core internal and external computer information systems to
understand the nature and extent of work required to make its systems Year
2000 ready. The Year 2000 readiness issue was concerned with the inability
of computerized information systems to accurately calculate, store or use a
date after 1999. The General Partners believed that a system failure or
miscalculation could cause disruptions of operations.
As a result of this concern, the General Partners, along with certain
affiliates, upgraded their computer systems including their hardware and
software so they would be Year 2000 ready. In addition, the General
Partners surveyed the Partnership's material third-party service providers
and significant vendors and received assurances that they were Year 2000
ready. The General Partners also developed contingency plans for all of
their "mission-critical functions" to insure business continuity. As a
result of these efforts and the efforts of third parties, the Year 2000 did
not result in any disruption of activities to the Partnership.
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 Unit per year.
On February 16, 2000 the Partnership received the remaining balance 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 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 and anticipates a
first quarter special distribution of $.58 per unit.
On January 11, 2000, the Partnership paid a special distribution of $.43
per Unit from the Saratoga Apartment PIM prepayment proceeds in the amount
of $6,204,960, received in December 1999. The Saratoga PIM was paid off
during 1999 when the property was refinanced. The underlying property value
had not increased sufficiently enough to meet the criteria for the
Partnership to earn any participation income.
On November 22, 1999 the Partnership paid a special distribution of $.72
per Unit from the Le Coeur du Monde Apartments PIM prepayment proceeds in
the amount of $9,422,001, received in October 1999. The partnership also
received participation income from its Le Coeur du Monde PIM investment in
the amount of $472,587 of accrued and unpaid participation income
attributable to property operations and $1,102,701 of participation income
attributable to the Partnership's share in the increase in the property's
value.
On June 18, 1999 the Partnership paid a special distribution of $.83 per
Unit from the Country Meadows Apartment PIM prepayment proceeds in the
amount of $12,015,224, received in May 1999. The underlying property value
had not increased sufficiently enough to meet the criteria for the
Partnership to earn any participation income. The Partnership did receive a
$60,076 prepayment premium for the early payoff of the Country Meadows PIM.
On February 26, 1999, the Partnership paid a special distribution of $1.97
per Unit from the prepayments of the Stanford Court, Hillside Court,
Carlyle Court and Waterford Court Apartment PIMs. On January 25, 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 penalties and $432,877 of Minimum
Additional Interest and Shared Income Interest during December 1998.
During 1998, the Partnership made three special distributions. The
Partnership made special distributions of $.94, $1.63 and $1.30 per Unit in
March 1998, July 1998 and December 1998, respectively. The March 1998
special distribution consisted of the prepayment proceeds from the
Fallwood, Greenbrier and Westbrooks PIMs. The July 1998 special
distributions consisted of the prepayment proceeds from the Longwood Villas
and Harbor House PIMs and the prepayment proceeds from the Brookside
insured mortgage. The December 1998 special distribution consisted of the
prepayment proceeds from the Walden Village PIM and the Lily Flagg insured
mortgage.
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.
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, owners are prohibited from prepaying the first
mortgage loans underlying the PIMs. During the second five years, owners
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.
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.
At December 31, 1999 the Partnership includes in cash and cash equivalents
approximately $10.6 million of commercial paper, which is issued by
entities with a credit rating equal to one of the top two rating categories
of a nationally recognized statistical rating organization.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk,
which can be defined as the exposure of the Partnership's net income,
comprehensive income or financial condition to adverse movements in
interest rates. At December 31, 1999, the Partnership's PIMs, PIMIs and MBS
comprise the majority of the Partnerhsip's assets. As such, decreases in
interest rates may accelerate the prepayment of the Partnership's
investments. The Partnership does not utilize any derivatives or other
instruments to manage this risk as the Partnership plans to hold all of its
investments to expected maturity.
The Partnership monitors prepayments and considers prepayment trends, as
well as distribution requirements of the Partnership, when setting regular
dividend distribution policy. For MBS, the fund forecasts prepayments based
on trends in similar securities as reported by statistical reporting
entities such as Bloomberg. For PIMs and PIMIs, the Partnership
incorporates prepayment assumptions into planning as individual properties
notify the Partnership of the intent to prepay or as they mature.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For mortgage
investments, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. The expected maturity
date is contractual maturity adjusted for expectations of prepayments.
Expected maturity dates ($ in thousands)
2000 2001 2002 2003 2004 Thereafter Total Fair
Value
Interest-sensitive assets:
MBS $ 1,527 $ 1,347 $ 1,194 $1,066 $ 959 $ 16,190 $22,283 $22,151
Weighted
Average interest rate 7.68% 7.68% 7.68% 7.68% 7.68% 7.68% 7.68%
PIMs 8,685 271 292 315 340 16,321 26,224 26,702
Weighted
Average interest rate 7.28% 7.28% 7.28% 7.28% 7.28% 7.28% 7.28%
Total Interest-
sensitive assets $ 10,212 $ 1,618 $1,486 $1,381 $1,299 $ 32,511 $48,507 $48,853
Results of Operations
The following discussion relates to the operation of the Partnership during
the years ended December 31, 1999, 1998 and 1997.
(Amounts in thousands)
1999 1998 1997
Interest income on PIMs:
Basic interest $ 3,682 $ 7,417 $ 11,090
Participation interest 1,635 3,753 1,816
Interest income on MBS 1,826 3,083 3,099
Other interest income 680 1,083 668
Partnership expenses (778) (1,287) (1,793)
Amortization of prepaid fees and
expenses (898) (2,031) (1,907)
Net Income $ 6,147 $ 12,018 $ 12,973
Net income decreased during 1999 as compared to 1998 primarily due to
significantly lower interest income on PIMs, MBS, and Other interest
income. This was partially offset by decreases in partnership expenses and
amortization. The reduction in basic interest on PIMs is due to the payoff
of the Carlyle Court, Hillside Court, Stanford Court, Waterford Court,
Country Meadows and Le Coeur du Monde PIMs in 1999, and the Westbrook
Manor, Fallwood, Greenbrier, Harbor House, Walden Village and Longwood
Villas PIMs during 1998. Participation income was higher in 1998 as
compared to 1999 due primarily to the Partnership realizing Shared
Appreciation Interest and/or prepayment premiums from the prepayments of
the Westbrook Manor, Fallwood, Greenbrier, Walden Village, Harbor House and
Longwood Villas PIMs and the Brookside and Lily Flagg insured mortgages
which were in excess of those amounts received when the Carlyle Court,
Hillside Court, Stanford Court, Waterford Court, Country Meadows and
LeCouer du Monde PIMs prepaid during 1999. 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. The decrease in Partnership expenses was
due to a decrease in asset management fees which were a result of the PIM
prepayments mentioned above that reduced the asset base. Amortization also
decreased due to the PIM prepayments. Other interest income decreased in
1999 as compared to 1998 due to significantly lower average cash balances
available for short-term investing in 1999 versus 1998.
Net income decreased during 1998 as compared to 1997 primarily due to
significantly lower basic interest on PIMs. This was partially offset by
increases in participation income and other interest income and a decrease
in Partnership expenses. The significant decrease in basic interest on PIMs
was caused by the prepayments of the Westbrook Manor, Fallwood, Greenbrier,
Harbor House, Walden Village and Longwood Villas PIMs during 1998 and
Lakeside, Colonial Park and Pine Ridge PIMs during 1997. The Partnership
realized a significant increase in participation income due primarily to
Shared Appreciation Income and prepayment premiums realized from the 1998
PIM prepayments of the Harbor House, Westbrook Manor, Fallwood, Greenbrier,
Walden Village and Longwood Villas Apartment PIMs, and the Brookside and
Lily Flagg MBS as compared to amounts received from the 1997 Lakeside PIM
prepayment. The Partnership also realized Shared Income Interest from its
PIMs in 1998 which exceeded the amount realized during 1997. Other interest
income increased due to the Partnership having higher average short-term
investment balances as a result of the prepayments mentioned above. The
decrease in Partnership expenses was due to a decrease in asset management
fees which were a result of the 1998 PIM prepayments mentioned above.
As the Partnership distributes principal collections on MBS and PIMs
through quarterly or special distributions, the invested assets of the
Partnership will decline which should result in a continuing decline in net
income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. Information as to
the directors and executive officers of Krupp Plus Corporation which is a
General Partner of the Partnership and is the general partner of Mortgage
Services Partners Limited Partnership, which is the other General Partner
of the Partnership, is as follows:
Name and Age Position with Krupp Plus Corporation
Douglas Krupp (53) President, Co-Chairman of the Board and Director
George Krupp (55) Co-Chairman of the Board and Director
Peter F. Donovan (46) Senior Vice President
Ronald Halpern (58) Senior Vice President
Carol Mills (50) Vice President
Robert A. Barrows (42) Vice President and Treasurer
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive
Officer of The Berkshire Group, an integrated real estate financial
services firm engaged in real estate acquisitions, property management,
investment sponsorship, venture capital investing, mortgage banking and
financial management, and ownership of three operating companies through
private equity investments. Mr. Krupp has held the position of Co-Chairman
since The Berkshire Group was established as The Krupp Companies in 1969
and he has served as the Chief Executive Officer since 1992. Mr. Krupp
serves as a member of the Board of Trustees at Brigham & Women's Hospital.
He is a graduate of Bryant College where he received an honorary Doctor of
Science in Business Administration in 1989 and was elected trustee in 1990.
George Krupp (age 55) is the Co-Founder and Co-Chairman of The Berkshire
Group, an integrated real estate financial services firm engaged in real
estate acquisitions, property management, investment sponsorship, venture
capital investing, mortgage banking and financial management, and ownership
of three operating companies through private equity investments. Mr. Krupp
has held the position of Co-Chairman since The Berkshire Group was
established as The Krupp Companies in 1969. Mr. Krupp has been an
instructor of history at the New Jewish High School in Waltham,
Massachusetts since September of 1997. Mr. Krupp attended the University of
Pennsylvania and Harvard University and holds a Master's Degree in History
from Brown University.
Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance
which position he has held since January of 1998 and in this capacity, he
oversees the strategic growth plans of this mortgage banking firm.
Berkshire Mortgage Finance is the 16th largest commercial mortgage servicer
in the United States with a servicing and asset management portfolio of
$7.2 billion. Previously he served as President of Berkshire Mortgage
Finance from January of 1993 to January of 1998 and in that capacity he
directed the production, underwriting, servicing and asset management
activities of the firm. Prior to that, he was Senior Vice President of
Berkshire Mortgage Finance and was responsible for all participating
mortgage originations. Before joining the firm in 1984, he was Second Vice
President, Real Estate Finance for Continental Illinois National Bank &
Trust, where he managed a $300 million construction loan portfolio of
commercial properties. Mr. Donovan received a B.A. from Trinity College and
an M.B.A. degree from Northwestern University.
Ronald Halpern is President and COO of Berkshire Mortgage Finance. He has
served in these positions since January of 1998 and in this capacity, he is
responsible for the overall operations of the Company. Prior to January of
1998, he was Executive Vice President, managing the underwriting, closing,
portfolio management and servicing departments for Berkshire Mortgage
Finance. Before joining the firm in 1987, he held senior management
positions with the Department of Housing and Urban Development in
Washington D.C. and several HUD regional offices. Mr. Halpern has over 30
years of experience in real estate finance. He is currently a member of the
Advisory Council for Fannie Mae and Freddie Mac and was prior Chairman of
the MBA Multifamily Housing Committee. He holds a B.A. degree from the
University of the City of New York and J.D. degree from Brooklyn Law
School.
Robert A. Barrows is Senior Vice President and Chief Financial Officer of
Berkshire Mortgage Finance. Mr. Barrows has held several positions within
The Berkshire Group since joining the company in 1983 and is currently
responsible for accounting, financial reporting, treasury and management
information systems for Berkshire Mortgage Finance. Prior to joining The
Berkshire Group, he was an audit supervisor for Coopers & Lybrand L.L.P. in
Boston. He received a B.S. degree from Boston College and is a Certified
Public Accountant.
Carol J.C. Mills is Senior Vice President for Loan Management of Berkshire
Mortgage Finance and in this capacity, she is responsible for the Loan
Servicing and Asset Management functions of the Boston, Bethesda and
Seattle offices of Berkshire Mortgage Finance. She manages the estimated
$7.2 billion portfolio of loans. Ms. Mills joined Berkshire in December
1997 as Vice President and was promoted to Senior Vice President in January
1999. From January 1989 through November 1997, Ms. Mills was Vice President
of First Winthrop Corporation and Winthrop Financial Associates, in
Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke College
and a Master of Architecture degree from Harvard University. Ms. Mills is a
member of the Real Estate Finance Association, New England Women in Real
Estate and the Mortgage Bankers Association.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1999, no person owned of record or was known by the
General Partners to own beneficially more than 5% of the Partnership's
14,655,512 outstanding Units. The only interests held by management or its
affiliates consist of its General Partner and Corporate Limited Partner
Interests.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in Note F to the
Partnership's Notes To Financial Statements presented in Appendix A to this
report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements and
Schedule included under Item 8, Appendix A, page F-2 to this report.
2. Financial Statement Schedule - see Index to Financial Statements and
Schedule included under Item 8, Appendix A, page F-2 to this report. All
other schedules are omitted as they are not applicable, not required or the
information is provided in the Financial Statements or the Notes thereto.
(b) Exhibits:
Number and Description
Under Regulation S-K
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K:
(4) Instruments defining the rights of security holders including
indentures:
(4.1)Amended and Restated Agreement of Limited Partnership dated as
of May 29, 1987 [Exhibit A to Prospectus included in Post
Effective Amendment No. 1 of Registrant's Registration Statement
on Form S-11 dated June 18, 1987 (File No. 33-9889)].*
(4.2)Second Amendment to Agreement of Limited Partnership dated as of
June 17, 1987 [Exhibit 4.6 in Post Effective Amendment No. l of
Registrant's Registration Statement on Form S-11 dated June 18,
1987 (File No. 33-9889)].*
(4.3)Subscription Agreement whereby a subscriber agrees to purchase
Units and adopts the provisions of the Amended and Restated
Agreement of Limited Partnership [Exhibit D to Prospectus
included in Post Effective Amendment No. 1 of Registrant's
Registration Statement on Form S-11 dated June 18, 1987 (File No.
33-9889)].*
(4.4)Copy of Amended Certificate of Limited Partnership filed with
the Massachusetts Secretary of State on April 28, 1987. [Exhibit
4.4 in Amendment No. 1 of Registrant's Registration Statement on
Form S-11 dated May 14, 1987 (File No. 33-9889)].*
(10) Material Contracts:
(10.1) Form of agreement between the Partnership and Krupp Mortgage
Corporation. [Exhibit 10.3 in Amendment No. 1 of Registrant's
Registration Statement on Form S-11 dated May 14, 1987 (File No.
33-9889)].*
Denrich Apartments
(10.2) Prospectus for GNMA Pool No. 267075 (PL). [Exhibit 10.29 to
Registrant's Report on Form 10-K for the year ended December 31,
1988 (File No. 0-16817)].*
(10.3) Subordinated Multifamily Mortgage (including Subordinated
Promissory Note) dated November 3, 1988 between Arthur J.
Stagnaro and Krupp Insured Plus-II Limited Partnership. [Exhibit
10.30 to Registrant's Report on Form 10-K for the year ended
December 31, 1988 (File No. 0-16817)].*
(10.4) Modification Agreement dated June 28, 1995 between Arthur J.
Stagnaro and Krupp Insured Plus-II Limited Partnership [Exhibit
10.1 to Registrant's Report on Form 10-Q for the quarter ended
June 30, 1995 (File No. 0-16817)].*
The Greenhouse
(10.5) Prospectus for GNMA Pools No. 259233(CS) and 259234(PN)
[Exhibit 19.1 to Registrant's Report on Form 10-Q for the quarter
ended March 31, 1989 (File No. 0-16817)].*
(10.6) Subordinated Multifamily Deed of Trust (including Subordinated
Promissory Note) dated January 5, 1989 between Farnam Associates
Limited Partnership and Krupp Insured Plus-II Limited
Partnership. [Exhibit 19.2 to Registrant's Report on Form 10-Q
for the quarter ended March 31, 1989 (File No. 0-16817)].*
Richmond Park Apartments
(10.7) Prospectus for GNMA Pool No. 260865 (PL) [Exhibit 1 to
Registrant's Report on Form 8-K dated August 30, 1989 (File No.
0-16817)].*
(10.8) Subordinated Multifamily Open-Ended Mortgage (including
Subordinated Promissory Note) dated July 14, 1989 between Carl
Milstein, Trustee, Irwin Obstgarten, Al Simon and Krupp Insured
Plus-II Limited Partnership. [Exhibit 2 to Registrant's Report on
Form 8-K dated August 30, 1989 (File No. 0-16817)]*
(10.9) Participation Agreement dated July 31, 1989 between Krupp
Insured Mortgage Limited Partnership and Krupp Insured Plus-II
Limited Partnership. [Exhibit 3 to Registrant's Report on Form
8-K dated August 30, 1989 (File No. 0-16817)].*
* Incorporated by reference.
(c) Reports on Form 8-K
During the last quarter of the year ended December 31, 1999, the
Partnership did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the
9th day of March, 2000.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
By: Krupp Plus Corporation,
a General Partner
By: /s/ Douglas Krupp
Douglas Krupp, President, Co-Chairman
(Principal Executive Officer) and Director of
Krupp Plus Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 9th day of March, 2000.
Signatures Title(s)
/s/Douglas Krupp President, Co-Chairman (Principal Executive Officer) and
Douglas Krupp Director of Krupp Plus Corporation, a General Partner
/s/George Krupp Co-Chairman (Principal Executive Officer) and Director of
George Krupp Krupp Plus Corporation, a General Partner
/s/Peter F. Donovan Senior Vice President of Krupp Plus Corporation,
Peter F. Donovan a General Partner
/s/Robert A. Barrows Treasurer and Chief Accounting Officer of
Robert A. Barrows Krupp Plus Corporation, a General Partner
APPENDIX A
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
FINANCIAL STATEMENTS AND SCHEDULE
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1999
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants F-3
Balance Sheets at December 31, 1999 and 1998 F-4
Statements of Income and Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Statements of Changes in Partners' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-7
Notes to Financial Statements F-8 - F-15
Schedule IV - Mortgage Loans on Real Estate F-16 - F-17
All other schedules are omitted as they are not applicable or not required,
or the information is provided in the financial statements or the notes
thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Krupp Insured Plus-II Limited Partnership:
In our opinion, the accompanying balance sheets and the related statements
of income and comprehensive income, of partners' equity and of cash flows,
and Schedule IV, present fairly, in all material respects, the financial
position of Krupp Insured Plus Limited Partnership (the "Partnership") at
December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with auditing principles generally accepted in the United
States. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted
in the United States which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 17, 2000
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
Participating Insured Mortgages ("PIMs")
(Notes B, C, H and I) $ 26,224,388 $ 82,258,207
Mortgage-Backed Securities and multi-family insured
mortgages("MBS") (Notes B, D and H) 22,277,956 24,792,352
Total mortgage investments 48,502,344 107,050,559
Cash and cash equivalents (Notes B, C, H and I) 11,093,183 8,758,737
Interest receivable and other assets 378,286 730,829
Prepaid acquisition fees and expenses, net of
accumulated amortization of $1,203,575 and $6,024,495
respectively (Note B) 179,095 889,863
Prepaid participation servicing fees, net of
accumulated amortization of $200,032 and $1,876,746,
respectively (Note B) 9,085 196,774
Total assets $ 60,161,993 $ 117,626,762
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 19,948 $ 252,769
Partners' equity (deficit) (Notes A, C, E and I):
Limited Partners 60,360,347 117,123,621
(14,655,512 Units outstanding)
General Partners (323,383) (290,140)
Accumulated comprehensive income(Note B) 105,081 540,512
Total Partners' equity 60,142,045 117,373,993
Total liabilities and Partners' equity $ 60,161,993 $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 Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Revenues:
Interest income - PIMs:
Basic interest $ 3,681,868 $ 7,416,814 $ 11,089,440
Participation income 1,634,686 3,752,675 1,816,364
Interest income - MBS 1,826,026 3,083,259 3,098,699
Other interest income 680,085 1,082,870 668,055
Total revenues 7,822,665 15,335,618 16,672,558
Expenses:
Asset management fee to an affiliate (Note F) 496,464 981,223 1,365,013
Expense reimbursement to affiliates (Note F) 94,160 57,448 162,269
Amortization of prepaid fees and expenses (Note B) 898,457 2,031,454 1,907,062
General and administrative 186,866 247,823 265,614
Total expenses 1,675,947 3,317,948 3,699,958
Net income (Notes E and G) 6,146,718 12,017,670 12,972,600
Other Comprehensive Income:
Net change in unrealized gain on MBS (435,431) (1,228,708) 1,213,884
Total Comprehensive Income $ 5,711,287 $ 10,788,962 $ 14,186,484
Allocation of net income (Notes E and G.):
Limited Partners $ 5,962,316 $ 11,657,140 $ 12,583,422
Average net income per Limited Partner
Interest (14,655,512 Limited Partner $ .41 $ .80 $ .86
interests outstanding)
General Partners $ 184,402 $ 360,530 $ 389,178
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
Balance at December 31, 1996 $207,196,050 $ (217,867) $ 555,336 $207,533,519
Net income 12,583,422 389,178 - 12,972,600
Quarterly distributions (16,414,173) (436,626) - (16,850,799)
Special distributions (24,767,815) - - (24,767,815)
Change in unrealized gain on MBS - - 1,213,884 1,213,884
Balance at December 31, 1997 178,597,484 (265,315) 1,769,220 180,101,389
Net income 11,657,140 360,530 - 12,017,670
Quarterly distributions (16,414,173) (385,355) - (16,799,528)
Special distributions (56,716,830) - - (56,716,830)
Change in unrealized gain on MBS - - (1,228,708) (1,228,708)
Balance at December 31, 1998 117,123,621 (290,140) 540,512 117,373,993
Net income 5,962,316 184,402 - 6,146,718
Quarterly distributions (11,138,189) (217,645) - (11,355,834)
Special distributions (51,587,401) - - (51,587,401)
Change in unrealized loss on MBS - - (435,431) (435,431)
Balance at December 31, 1999 $ 60,360,347 $(323,383) $ 105,081 $ 60,142,045
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Operating activities:
Net income $ 6,146,718 $ 12,017,670 $ 12,972,600
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums - - 231,706
Amortization of prepaid fees and expenses 898,457 2,031,454 1,907,062
Shared Appreciation Income and prepayment
premiums (1,162,777) (2,390,707) (602,856)
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 352,543 449,831 423,641
(Decrease) increase in liabilities (232,821) 227,181 6,688
Net cash provided by operating activities 6,002,120 12,335,429 14,938,841
Investing activities:
Principal collections on
PIMs including Shared Appreciation Income
and prepayment premiums of $1,162,777 in 1999,
$2,255,077 in 1998, and $602,856 in 1997, respectively 57,196,596 42,044,923 18,422,260
Principal collections on MBS including
prepayment premiums of $135,630 in 1998 2,078,965 18,842,263 9,388,723
Net cash provided by investing activities 59,275,561 60,887,186 27,810,983
Financing activities:
Quarterly Distributions (11,355,834) (16,799,528) (16,850,799)
Special distributions (51,587,401) (56,716,830) (24,767,815)
Net cash used for financing activities (62,943,235) (73,516,358) (41,618,614)
Net increase (decrease) in cash and equivalents 2,334,446 (293,743) 1,131,210
Cash and cash equivalents, beginning of year 8,758,737 9,052,480 7,921,270
Cash and cash equivalents, end of year $ 11,093,183 $ 8,758,737 $ 9,052,480
Supplemental disclosure of non-cash investing
activities:
Reclassification of investment in a PIM to a MBS $ - $ - $ 11,850,469
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
A. Organization
Krupp Insured Plus-II Limited Partnership (the "Partnership") was formed on
October 29, 1986 by filing a Certificate of Limited Partnership in The
Commonwealth of Massachusetts. The Partnership was organized for the
purpose of investing in multi-family loans and mortgage backed securities.
The Partnership issued all of the General Partner Interests to Krupp Plus
Corporation and Mortgage Services Partners Limited Partnership in exchange
for capital contributions aggregating $3,000. The Partnership terminates on
December 31, 2026, unless terminated earlier upon the occurrence of certain
events as set forth in the Partnership Agreement.
The Partnership commenced the public offering of Units on May 29, 1987 and
completed its public offering having sold 14,655,412 Units for $292,176,381
net of purchase volume discounts of $931,859 as of May 27, 1988. In
addition, Krupp Depository owns one hundred units.
B. Significant Accounting Policies
The Partnership uses the following accounting policies for financial
reporting purposes, which may differ in certain respects from those used
for federal income tax purposes (Note G).
MBS
The Partnership, in accordance with Financial Accounting Standards Board's
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"), classifies its MBS portfolio as
available-for-sale. As such the Partnership carries its MBS at fair market
value and reflects any unrealized gains (losses) as a separate component of
Partners' Equity. The Partnership amortizes purchase premiums or discounts
over the life of the underlying mortgages using the effective interest
method.
Effective January 1, 1998 the Partnership adopted the, Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive Income'
(FAS 130). FAS 130 established standards for reporting and displaying
comprehensive income and its components. FAS 130 requires comprehensive
income and its components, as recognized under accounting standards, to be
displayed in a financial statement with the same prominence as other
financial statements, if material. Accordingly, unrealized gains (losses)
on the Partnership's available-for sale securities have been included in
other comprehensive income.
The Federal Housing Administration (FHA) insured mortgage is carried at
amortized cost. The Partnership holds this loan at amortized cost since it
is fully insured by the FHA.
PIMs
The Partnership accounts for the MBS portion of its PIM in accordance with
FAS 115 under the classification of held to maturity. The Partnership
carries the Government National Mortgage Association ("GNMA") MBS at
amortized cost.
Basic interest on PIMs is recognized based on the stated coupon rate of the
GNMA MBS. Participation income is recognized as earned and when deemed
collectible by the Partnership.
Cash and Cash Equivalents
The Partnership includes all short-term investments with maturities of
three months or less at the date of acquisition in cash and cash
equivalents. The Partnership invests its cash primarily in commercial paper
and money market funds with a commercial bank and has not experienced any
loss to date on its invested cash.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
B. Significant Accounting Policies, continued
Prepaid Fees and Expenses
Prepaid fees and expenses consist of acquisition fees and expenses and
participation servicing fees paid for the acquisition and servicing of
PIMs. The Partnership amortizes prepaid acquisition fees and expenses using
a method that approximates the effective interest method over a period of
ten to twelve years, which represents the actual maturity or anticipated
payoff of the underlying mortgage.
The Partnership amortizes prepaid participation servicing fees using a
method that approximates the effective interest method over a ten-year
period beginning at final endorsement of the loan.
Income Taxes
The Partnership is not liable for federal or state income taxes because
Partnership income is allocated to the partners for income tax purposes. If
the Partnership's tax returns are examined by the Internal Revenue Service
or state taxing authority and such an examination results in a change in
Partnership taxable income, such change will be reported to the partners.
Estimates and Assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
contingent assets and liabilities and revenues and expenses during the
period. Actual results could differ from those estimates.
C. PIMs
At December 31, 1999 and 1998, the Partnership had investments in three
PIMs and six PIMs, respectively. The Partnership's PIMs consist of a GNMA
MBS representing the securitized first mortgage loan on the underlying
property and participation interests in the revenue stream and appreciation
of the underlying property above specified base levels. The borrower
conveys these participation features to the Partnership generally through a
subordinated promissory note and mortgage (the "Agreement").
The Partnership receives guaranteed monthly payments of principal and basic
interest on the GNMA MBS and HUD insures the first mortgage loan underlying
the GNMA MBS.
The borrower usually cannot prepay the first mortgage loan during the first
five years and usually may prepay the first mortgage loan thereafter
subject to a 9% prepayment premium in years six through nine, a 1%
prepayment premium in year ten and no prepayment premium thereafter. The
Partnership may receive income related to its participation interests in
the underlying property, however, these amounts are neither insured nor
guaranteed.
Generally, the participation features consist of the following: (i)
"Minimum Additional Interest" rates ranging from .5% to .75% per annum
calculated on the unpaid principal balance of the first mortgage on the
underlying property , (ii) "Shared Income Interest" is 25% of the monthly
gross rental income generated by the underlying property in excess of a
specified base, but only to the extent that it exceeds the amount of
Minimum Additional Interest received during such month, (iii) "Shared
Appreciation Interest" is 25% of any increase in the value of the
underlying property in excess of a specified base. Payment of Minimum
Additional Interest and Shared Income Interest from the operations of the
property is limited to 50% of net revenue or surplus cash as defined by
Fannie Mae or HUD, respectively.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
C. PIMs, continued
The total amount of Minimum Additional Interest, Shared Income Interest and
Shared Appreciation interest payable on the maturity date by the underlying
borrower usually cannot exceed 50% of any increase in value of the
property.
Shared Appreciation Interest is payable when one of the following occurs:
(1) the sale of the underlying property to an unrelated third party on a
date which is later than five years from the date of the Agreement, (2) the
maturity date or accelerated maturity date of the Agreement, or (3)
prepayment of amounts due under the Agreement and the insured mortgage.
Under the Agreement, the Partnership, upon giving twelve months written
notice, can accelerate the maturity date of the Agreement and insured
mortgage to a date not earlier than ten years from the date of the
Agreement for (a) the payment of all participation interest due under the
Agreement as of the accelerated maturity date, or (b) the payment of all
participation interest due under the Agreement plus all amounts due on the
first mortgage note on the property.
In December 1999, the Partnership received principal of $6,204,960 from the
repayment of the Saratoga Apartments PIM. On January 11, 2000 the
Partnership paid a special distribution of $.43 per Limited Partner
interest from the principal proceeds from the Saratoga payoff.
In September 1999, the Partnership received Shared Appreciation Interest
and accrued Minimum Additional and Shared Income Interest of $1,102,701 and
$472,587, respectively in connection with the Le Coeur du Monde PIM. The
Partnership also received $279,447 relating to repayment of interest rate
rebates. The Partnership received the principal proceeds of $9,422,001 in
October. The principal proceeds and Shared Appreciation Income were
distributed to the Limited Partners through a special distribution of $.72
per Limited Partner interest on November 22, 1999.
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.
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 during January 1999, and
Shared Appreciation Interest and prepayment premiums of $860,052, and
accrued Minimum Additional and Shared Income Interest of $432,877 during
December 1998 from these prepayments.
On October 19, 1998, the Partnership received a prepayment on the Walden
Village Apartment's PIM of $6,990,486. Also, the Partnership received a
prepayment premium of $165,599. On December 4, 1998, the Partnership made a
special distribution to the investors of $.49 per Limited Partner interest.
During the second quarter of 1998, the Partnership received prepayments of
the Harbor House and Longwood Villas Apartments PIMs. The Partnership
received the outstanding principal balance of $12,146,408 and a prepayment
premium of $750,000 from the Harbor House PIM and the outstanding principal
balance of $6,261,587 from the Longwood Villas PIM. During the first
quarter of 1998, the Partnership received a prepayment premium of $62,616
from the Longwood Villas PIM. The Partnership made a special distribution
of $.43 per Limited Partner interest relating to the Longwood Villas
Apartments PIM on July 17, 1998 and a special distribution of $.88 per
Limited Partner interest for the Harbor House Apartment PIM prepayment was
made on July 24, 1998.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
C. PIMs, continued
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 $416,810 of Shared Appreciation
Interest and $632,002 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.
At December 31, 1999 and 1998 there were no loans within the Partnership's
portfolio that were delinquent as to principal or interest.
Listed in the chart is a summary of the Partnership's PIM investments. The
Partnership's PIMs consisted of the following at December 31, 1999 and
1998:
Aggregate Number Permanent
Original of PIMs Interest Maturity Investment Basis
Issuer Principal at 12/31/99 Rate Range Date Range at December 31,
1999 1998
GNMA $ 28,310,900 3 6.75%-8.5% 12/23 - 2/30 $26,224,388 $54,290,923
(a) (b)
Fannie
Mae - - - - - 27,967,284
$ 28,310,900 3 $26,224,388 $82,258,207
(a) Includes one PIM - Richmond Park - in which the Partnership holds
a 62% interest and the remaining portion is held by an affiliate
of the Partnership.
(b) On June 28, 1995, the Partnership entered into a temporary basic
interest rate reduction agreement on the Denrich Apartments PIM.
Beginning July 1, 1995, the basic interest rate decreased from 8%
per annum to 6.25% per annum for thirty months, then increased to
6.75% per annum for the following thirty-six month period and
then will increase to the original interest rate of 8% per annum.
The difference between basic interest at the original rate and
the reduced rates will accumulate and be payable from surplus
cash or from the net proceeds of a sale or refinancing. These
accumulated amounts will be due and payable prior to any
distributions to the borrower or payment of participation income
to the Partnership. Also under the agreement, the base level for
calculating Shared Appreciation Interest decreased from
$4,025,000 to $3,500,000.
The underlying mortgages of the PIMs are collateralized by multi-family
apartment complexes located in 3 states. The apartment complexes range in
size from 91 to 736 units.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
D. MBS
On October 15, 1998, the Partnership received a repayment on the Lily Flagg
MBS of $11,721,863. A prepayment premium of $117,330 was received on
September 17, 1998. On December 2, 1998, the Partnership made a special
distribution to investors of $.81 Per Limited Partner interest.
On June 19, 1998, the Partnership received a prepayment of the Brookside
insured mortgage in the amount of $4,605,549, representing the outstanding
principal balance, and a prepayment premium of $18,300. The Partnership
made a special distribution of $.32 Per limited partner interest on July
24, 1998.
At December 31, 1999, the Partnership's MBS portfolio has an amortized cost
of $10,409,242 and unrealized gains and losses of $247,471 and $142,390,
respectively. At December 31, 1998, the Partnership's MBS portfolio had an
amortized cost of $12,380,666 and unrealized gains of $540,512. The
Partnership's MBS have maturities ranging from 2007 to 2030. At December
31, 1999 and 1998 the Partnership's Insured Mortgage Portfolio had an
amortized cost of $11,763,633 and $11,871,174, respectively.
Unrealized
Maturity Date Fair Value Gain/(Loss)
2001 - 2005 $ - $ -
2006 - 2010 1,667,033 107,249
2011 - 2030 20,483,993 (129,098)
Total $ 22,151,026 $ (21,849)
E. Partners' Equity
Profits and losses from Partnership operations and Distributable Cash Flow
are allocated 97% to the Unitholders and Corporate Limited Partner (the
"Limited Partners") and 3% to the General Partners.
Upon the occurrence of a capital transaction, as defined in the Partnership
Agreement, net cash proceeds will be distributed first, to the Limited
Partners until they have received a return of their total invested capital,
second, to the General Partners until they have received a return of their
total invested capital, third, 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners receive an amount equal to any
deficiency in the 11% cumulative return on their invested capital that
exists through fiscal years prior to the date of the capital transaction,
fourth, to the class of General Partners until they have received an amount
equal to 4% of all amounts of cash distributed under all capital
transactions and fifth, 96% to the Limited Partners and 4% to the General
Partners.
Profits arising from a capital transaction, will be allocated in the same
manner as related cash distributions. Losses from a capital transaction
will be allocated 97% to the Limited Partners and 3% to the General
Partners.
During 1999 the Partnership made quarterly distributions totaling $.76 per
Unit. During 1998 and 1997 the Partnership made quarterly distributions
totaling $1.12 per Unit. The partnership made special distributions of
$3.52 and $3.87 and $1.69 per Unit in 1999, 1998 and 1997, respectively.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
E. Partners' Equity, continued
As of December 31, 1999, the following cumulative partner contributions and
allocations have been made since the inception of the Partnership:
Corporate Accumulated
Limited General Comprehensive
Unitholders Partner Partners Income Total
Capital $292,176,381 $ 2,000 $ 3,000 $ - $ 292,181,381
contributions
Syndication
costs (15,580,734) - - - (15,580,734)
Quarterly
Distributions (238,026,211) (1,660) (5,732,386) - (243,760,257)
Special
Distributions (153,002,499) (1,044) - - (153,003,543)
Net income 174,792,893 1,221 5,406,003 - 180,200,117
Unrealized
gain on MBS - - - 105,081 105,081
Total at
December 31
1999 $ 60,359,830 $ 517 $ (323,383) $ 105,081 $ 60,142,045
F. Related Party Transactions
Under the terms of the Partnership Agreement, the General Partners or their
affiliates are entitled to an asset management fee for the management of the
Partnership's business, equal to .75% per annum of the value of the
Partnership's actual and committed mortgage assets, payable quarterly. The
General Partners may also receive an incentive management fee in an amount equal
to .3% per annum on the Partnership's total invested assets provided the
Unitholders have received their specified non-cumulative annual return on their
Invested Capital. Total fees payable to the General Partners for management
services shall not exceed 10% of cash available for distribution over the life
of the Partnership. Additionally, the Partnership reimburses affiliates of the
General Partners for certain costs incurred in connection with maintaining the
books and records of the Partnership and the preparation and mailing of
financial reports, tax information and other communications to investors.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
G. Federal Income Taxes
The reconciliation of the income reported in the accompanying financial
statements with the income reported in the Partnership's 1999 federal income tax
return is as follows:
Net income per statement of income $ 6,146,718
Less: Book to tax difference for amortization of
prepaid expenses and fees (1,256,656)
Net income for federal income tax purposes $ 4,890,062
The allocation of the 1999 net income for federal income tax purposes is as
follows:
Portfolio
Income
Unitholders $ 4,778,210
Corporate Limited Partner 33
General Partners 111,819
$ 4,890,062
For the years ended December 31, 1999, 1998 and 1997 the average per unit income
to the Unitholders for federal income tax purposes was $.33, $.68 and $.86
respectively.
The basis of the Partnership's assets for financial reporting purposes is less
than its tax basis by approximately $1,523,000 and $2,344,000 at December 31,
1999 and 1998, respectively. The basis of the Partnership's liabilities for
financial reporting purposes are the same as its tax basis at December 31, 1999
and 1998, respectively.
H. Fair Value Disclosures of Financial Instruments
The Partnership uses the following methods and assumptions to estimate the fair
value of each class of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
those instruments.
MBS
The Partnership estimates the fair value of MBS based on quoted market prices
while it estimates the fair value of insured mortgages based on quoted prices of
MBS with similar interest rates. Based on the estimated fair value determined
using these methods and assumptions, the Partnership's investments in MBS had
gross unrealized gains and losses of approximately $247,000 and $269, 000 at
December 31, 1999 and $541,000 and $0 at December 31, 1998.
PIMs
There is no active trading market for these investments. Management estimates
the fair value of the PIMs using quoted market prices of MBS having a similar
interest rate. Management does not include any participation interest in the
Partnership's estimated fair value arising from the properties, because
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
H. Fair Value Disclosures of Financial Instruments, continued
PIMs, continued
Management does not believe it can predict the time of realization of the
feature with any certainty. Based on the estimated fair value determined using
these methods and assumptions, the Partnership's investments in PIMs had gross
unrealized gains of approximately $478,000 at December 31, 1999 and gross
unrealized gains of approximately $2,099,000 at December 31, 1998.
At December 31, 1999 and 1998, the estimated fair values of the Partnership's
financial instruments are as follows:
1999 1998
Fair Carrying Fair Carrying
Value Value Value Value
Cash and cash equivalents $ 11,093 $ 11,093 $ 8,759 $ 8,759
MBS and insured mortgages 22,151 22,278 24,792 24,792
PIMs 26,702 26,224 84,357 82,258
$ 59,946 $ 59,595 $117,908 $115,809
I. Subsequent Event
On February 16, 2000 the Partnership received the remaining balance 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 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 and anticipates a first quarter special distribution of
$.58 per unit.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
Normal
Monthly Carrying
Interest Maturity Payment Original Current Amount at
PIMs (a) Rate (b) Date (g) (h) Face Amount Face Amount 12/31/99(j)
GNMA
Denrich Apartments 6.75% 12/15/23 24,900 $ 3,500,000 $ 3,193,146 $ 3,193,146
Philadelphia, PA (c)(e)
(f)(i)
Richmond Park 7.50% 8/15/24 107,900 16,000,000 14,597,481 14,597,481
Richmond Heights, (c)(e)(f)
OH
The Greenhouse 8.50% 2/15/30 64,600 8,810,900 8,433,761 8,433,761
Omaha, NE (d)(e)(f)
$28,310,900 $26,224,388 $26,224,388
(a) The Participating Insured Mortgages ("PIMs") consist of a
mortgage-backed security ("MBS") guaranteed by the Government
National Mortgage Association ("GNMA") and a subordinated
promissory note with the underlying Borrower that conveys
participation interests in the revenue stream and appreciation of
the underlying property above certain specified base levels.
(b) Represents the permanent interest rate of the GNMA MBS. In
addition, the Partnership receives additional interest consisting
of (i) Minimum Additional Interest, (ii) Shared Income Interest
and (iii) Shared Appreciation Interest.
(c) Minimum Additional Interest is at a rate of .5% per annum
calculated on the unpaid principal balance of the first mortgage
note.
(d) Minimum Additional Interest is at a rate of .75% per annum
calculated on the unpaid principal balance of the first mortgage
note.
(e) Shared Income Interest is based on 25% of monthly gross rental
income over a specified base amount.
(f) Shared Appreciation Interest is based on 25% of any increase in
the value of the project over the specified base value.
(g) The Partnership's GNMA MBS have call provisions, which allow the
Partnership to accelerate their respective maturity date.
(h) The normal monthly payment consisting of principal and basic
interest is payable monthly at level amounts over the term of the
GNMA MBS. The GNMA MBS generally may not be prepaid during the
first five years and may be prepaid subject to a 9% prepayment
penalty in years six through nine, a 1% prepayment penalty in
year ten and no prepayment penalty after year ten.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE, continued
December 31, 1999
(i) On June 28, 1995, the Partnership entered into a temporary basic
interest rate reduction agreement on the Denrich Apartments PIM.
Beginning July 1, 1995, the basic interest rate decreased from 8%
per annum to 6.25% per annum for thirty months, then increased to
6.75% per annum for the following thirty-six month period and
then will increase to the original rate of 8% per annum. The
difference between basic interest at the original interest rate
and the reduced rates will accumulate and be payable from surplus
cash or from the net proceeds of a sale or refinancing. These
accumulated amounts will be due and payable prior to any
distributions to the borrower or payment of participation income
to the Partnership. Also under the agreement, the Base Value for
calculating Shared Appreciation Interest decreased from
$4,025,000 to $3,500,000.
(j) The aggregate cost of PIMs for federal income tax purposes is
$26,224,388.
A reconciliation of the carrying value of PIMs for each of the three years in
the period ended December 31, 1999 is as follows:
1999 1998 1997
Balance at beginning of period $ 82,258,207 $ 122,048,053 $151,717,926
Deductions during period:
Reclassification - - (11,850,469)
Prepayments and
principal collections (56,033,819) (39,789,846) (17,819,404)
Balance at end of period $ 26,224,388 $ 82,258,207 $122,048,053
Unaudited 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 by Section 17 of the Partnership
Agreement, and the source of cash distributions for the year ended December 31,
1999 and the period from inception through December 31, 1999. 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 per Unit amounts)
Year Ended Through Inception
12/31/99 12/31/99
Distributable Cash Flow:
Income for tax purposes $ 4,890 $181,828
Items not requiring (not providing) the use of
operating funds:
Amortization of prepaid fees and expenses 2,155 16,006
Acquisition expenses paid from offering
proceeds charged to operations - 690
Shared Appreciation Income/prepayment premiums (1,163) (6,158)
Gain on sale of MBS - (377)
Total Distributable Cash Flow ("DCF") $ 5,882 $191,989
Limited Partners Share of DCF $ 5,705 $186,229
Limited Partners Share of DCF per Unit $ .39 $ 12.71
General Partners Share of DCF $ 177 $ 5,760
Net Proceeds from Capital Transactions:
Principal collections on PIMs and PIM sale proceeds
including Shared Appreciation Income/prepayment premiums $57,197 $165,577
Principal collections on MBS and MBS sale proceeds 2,079 92,409
Reinvestment of MBS and PIM principal collections
and sale proceeds - (41,966)
Gain on sale of MBS - 377
Total Net Proceeds from Capital Transactions $59,276 $216,397
Cash available for distribution
(DCF plus proceeds from Capital Transactions) $65,158 $408,386
Distributions:
Limited Partners $66,390(a) $398,799(b)
Limited Partners Average per Unit $ 4.53(a) $ 27.21(b)(c)
General Partners $ 177(a) $ 5,760(b)
Total Distributions $66,567 $404,559
(a) Represents all distributions paid in 1999 except the February
1999 distribution and includes the special distribution paid in
January 2000 and an estimate of the distribution to be paid in
February 2000.
(b) Includes the special distribution paid in January 2000 and an
estimate of the distribution to be paid in February 2000.
(c) Limited Partners average per Unit return of capital as of
February 2000 is $14.50 [$27.21 - $12.71] 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.