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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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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
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Krupp Insured Plus-II Limited Partnership
Massachusetts 04-2955007
(State or other jurisdiction of incorporation or organization) (IRS employer
identification no.)
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. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
prepayments of mortgages; failure of borrowers to pay participation interests
due to poor operating results of properties underlying the mortgages; uninsured
losses and potential conflicts of interest between the Partnership and its
Affiliates, including the General Partners. The Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 2001, contain additional information concerning such
risk factors. Actual results in the future could differ materially from those
described in any forward-looking statements as a result of the risk factors set
forth above, and the risk factors described in the Annual Report.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
------------------- ------------------
Participating Insured Mortgages ("PIMs")(Note 2) $ - $ 3,101,005
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 14,313,515 30,211,162
------------------- ------------------
Total mortgage investments 14,313,515 33,312,167
Cash and cash equivalents 15,858,095 933,678
Interest receivable and other assets 112,512 221,124
------------------- ------------------
Total assets $ 30,284,122 $ 34,466,969
=================== ==================
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 84,855 $ 17,875
------------------- ------------------
Partners' equity (deficit) (Note 4):
Limited Partners
(14,655,512 Limited Partner
interests outstanding) 30,354,914 34,084,355
General Partners (343,653) (341,667)
Accumulated comprehensive income 188,006 706,406
------------------- ------------------
Total Partners' equity 30,199,267 34,449,094
------------------- ------------------
Total liabilities and Partners' equity $ 30,284,122 $ 34,466,969
=================== ==================
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,
----------------------------------------------------------------------
2002 2001 2002 2001
---------------- ------------- -------------- ---------------
Revenues:
Interest income - PIMs:
Basic interest $ 121,186 $ 152,093 $ 183,038 $ 488,700
Participation interest - 30,769 - 30,769
Interest income - MBS 454,391 466,875 1,037,960 876,742
Other interest income 23,925 48,349 29,600 92,806
---------------- ------------- -------------- ---------------
Total revenues 599,502 698,086 1,250,598 1,489,017
---------------- -------------- -------------- ---------------
Expenses:
Asset management fee to an affiliate 46,328 65,651 105,917 136,740
Expense reimbursements to affiliates 33,918 31,230 58,395 56,706
Amortization of prepaid fees and
expenses - 25,965 - 47,933
General and administrative 73,783 40,554 96,262 61,493
---------------- -------------- -------------- ---------------
Total expenses 154,029 163,400 260,574 302,872
---------------- -------------- -------------- ---------------
Net income 445,473 534,686 990,024 1,186,145
Other comprehensive income:
Net change in unrealized gain on MBS (497,260) 246,665 (518,400) 376,385
---------------- -------------- -------------- ---------------
Total comprehensive income $ (51,787) $ 781,351 $ 471,624 $ 1,562,530
================ ============== ============== ===============
Allocation of net income (Note 4):
Limited Partners $ 432,109 $ 518,646 $ 960,323 $ 1,150,561
================ ============== ============== ===============
Average net income per Limited Partner
interest (14,655,512 Limited Partner
interests outstanding) $ .03 $ .04 $ .07 $ .08
================ ============== ============== ===============
General Partners $ 13,364 $ 16,040 $ 29,701 $ 35,584
================ ============== ============== ===============
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,
------------------------------------
2002 2001
------------------------------------
Operating activities:
Net income $ 990,024 $ 1,186,145
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of prepaid fees and expenses - 47,933
Premium amortization - 38,286
Changes in assets and liabilities:
Decrease in interest receivable and other assets 108,612 32,752
Increase in liabilities 66,980 18,848
---------------- ------------------
Net cash provided by operating activities 1,165,616 1,323,964
---------------- ------------------
Investing activities:
Principal collections on PIMs 3,101,005 95,367
Principal collections on MBS 15,379,247 5,078,802
---------------- ------------------
Net cash provided by investing activities 18,480,252 5,174,169
---------------- ------------------
Financing activities:
Quarterly distributions (1,497,239) (2,968,234)
Special distribution (3,224,212) -
---------------- -----------------
Net cash used for financing activities (4,721,451) (2,968,234)
---------------- ------------------
Net increase in cash and cash equivalents 14,924,417 3,529,899
Cash and cash equivalents, beginning of period 933,678 3,125,710
---------------- ------------------
Cash and cash equivalents, end of period $ 15,858,095 $ 6,655,609
================ ==================
Supplemental disclosure of non-cash investing activities:
Reclassification of investment in a PIM to a MBS $ - $ 14,320,749
================ ==================
Non cash activities:
Increase (decrease) in Fair Value of MBS $ (518,400) $ 376,385
================ ==================
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 accounting principles
generally accepted in the United States of America 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, 2001 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, 2002, the
results of operations for the three and six months ended June 30, 2002
and 2001 and its cash flows for the six months ended June 30, 2002 and
2001.
The results of operations for the three and six months ended June 30,
2002 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
On May 15, 2002, the Partnership received $3,084,121 representing the
principal proceeds on the first mortgage loan from the Denrich
Apartments PIM. In addition, the Partnership received $100,625 from an
affiliate to compensate the fund for the inability to collect the
accumulated but unpaid interest that resulted from the interest rate
reduction agreement entered into in June, 1995. On June 19, 2002, the
Partnership paid a special distribution of $.22 per Limited Partner
interest from the principal proceeds received.
3. MBS
The Partnership received a payoff of the Richmond Park Apartments MBS
on June 17, 2002 for $14,073,943. The Partnership intends to pay a
special distribution of $.97 per Limited Partner interest from the
proceeds of the Richmond Park prepayment in the third quarter of 2002.
At June 30, 2002, the Partnership's MBS portfolio had an amortized cost
of $2,669,366 and unrealized gains of $188,006. At June 30, 2002, the
Partnership's insured mortgage had an amortized cost of $11,456,143 and
a gross unrealized gain of $515,526. The portfolio had maturities
ranging from 2008 to 2028.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended
June 30, 2002 is as follows:
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------- ----------- ------------- --------------
Balance at December 31, 2001 $ 34,084,355 $ (341,667) $ 706,406 $ 34,449,094
Net income 960,323 29,701 - 990,024
Quarterly distributions (1,465,552) (31,687) - (1,497,239)
Special Distribution (3,224,212) - - (3,224,212)
Change in unrealized gain
on MBS - - (518,400) (518,400)
------------- ----------- ------------- --------------
Balance at June 30, 2002 $ 30,354,914 $ (343,653) $ 188,006 $ 30,199,267
============= =========== ============= ==============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this quarterly report on
Form 10-Q constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Partnership's actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among other things, federal, state or local regulations; adverse changes in
general economic or local conditions; pre-payments of mortgages; failure of
borrowers to pay participation interests due to poor operating results at
properties underlying the mortgages; uninsured losses and potential conflicts of
interest between the Partnership and its Affiliates, including the General
Partners.
Liquidity and Capital Resources
At June 30, 2002, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $15.9 million as well as the cash flow provided by
its investment in the MBS. The Partnership anticipates that these sources will
be adequate to provide the Partnership with sufficient liquidity to meet its
obligations as well as to provide distributions to its investors.
The most significant demand on the Partnership's liquidity is the quarterly
distribution paid to investors of approximately $733,000. Funds for the
quarterly distributions come from the monthly principal and interest payments
received on the MBS, the principal prepayments of the MBS and interest earned on
the Partnership's cash and cash equivalents. 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. 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
Partnership will pay its current distribution rate of $.05 per Limited Partner
interest per quarter in August and November. With the payoff of the Denrich PIM,
the Partnership will determine the market value of the remaining assets in the
Partnership and anticipates that a final liquidating distribution will be made
prior to year end.
The Partnership received a payoff of the Richmond Park Apartments MBS on June
17, 2002 for $14,073,943. The Partnership intends to pay a special distribution
of $.97 per Limited Partner interest from the proceeds of the Richmond Park
prepayment in the third quarter of 2002.
On May 15, 2002, the Partnership received $3,084,121 representing the principal
proceeds on the first mortgage loan from the Denrich Apartments PIM. In
addition, the Partnership received $100,625 from an affiliate to compensate the
fund for the inability to collect the accumulated but unpaid interest that
resulted from the interest rate reduction agreement entered into in June 1995.
On June 19, 2002, the Partnership paid a special distribution of $.22 per
Limited Partner interest from the principal proceeds received.
Critical Accounting Policy
The Partnership's critical accounting policy relates primarily to revenue
recognition related to the participation feature of the Partnership's PIM
investment. The Partnership's policy is as follows:
Basic interest on the PIM is recognized based on the stated coupon rate of the
GNMA MBS. The Partnership's recognizes interest related to the participation
feature when the amount becomes fixed and the transaction that gives rise to
such amount is consummated.
Results of Operations
Net income decreased in the three months ended June 30, 2002 as compared to June
30, 2001 primarily due to lower basic and participation interest on PIMs, MBS
interest income and other interest income. This decrease was also due to an
increase in general and administrative expenses and was partially offset by
decreases in asset management fees and amortization expense. The reduction in
basic interest on PIMs is primarily due to the reclassification of the Richmond
Park PIM to a MBS in May 2001. Basic interest on PIMs also decreased due to the
payoff of the Denrich Apartments PIM in May 2002. MBS interest decreased due to
the payoff of the Orchard Landing MBS in May 2001, but this decrease was
partially offset by the Richmond Park reclassification. Participation interest
was greater in 2001 due to the settlement to release the Richmond Park PIM's
participation features. Other interest income decreased due to significantly
lower average interest rates earned on cash balances available for short-term
investing in the three-month period ended June 30, 2002 versus the same period
last year. General and administrative expense was higher in 2002 when compared
to 2001 due to the overpayment of 2000 processing costs refunded in 2001. Asset
management fees decreased due to the decrease in the Partnership's investments
as a result of principal collections and payoffs. Amortization expense was
greater during the three months ended June 30, 2001 as compared to June 30, 2002
as a result of the remaining prepaid fees and expenses on the PIM prepayments
being fully amortized as of September 2001.
Net income decreased in the six months ended June 30, 2002 as compared to June
30, 2001 primarily due to lower basic interest on PIMs and other interest
income, and an increase in general and administrative expenses. This decrease
was partially offset by an increase in MBS interest income and decreases in
asset management fees and amortization expense. The reduction in basic interest
on PIMs is primarily due to the reclassification of the Richmond Park PIM to a
MBS in May 2001. Basic interest on PIMs also decreased due to the payoff of the
Denrich Apartments PIM in May 2002. MBS interest increased due to the Richmond
Park reclassification, but this increase was partially offset by the payoff of
the Orchard Landing MBS in May 2001. General and administrative expense was
higher in 2002 when compared to 2001 due to the overpayment of 2000 processing
costs refunded in 2001. Other interest income decreased due to significantly
lower average cash balances available for short-term investing and the interest
rates earned on those balances in the six-month period ended June 30, 2002
versus the same period last year. Asset management fees decreased due to the
decrease in the Partnership's investments as a result of principal collections
and payoffs. Amortization expense was greater during the six months ended June
30, 2001 as compared to June 30, 2002 as a result of the remaining prepaid fees
and expenses on the PIM prepayments being fully amortized as of September 2001.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by 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.
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 June 30, 2002 the Partnership included in cash and cash equivalents
approximately $15.6 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 June
30, 2002, the Partnership's MBS comprised the majority of the Partnership's
assets. Decreases in interest rates may accelerate the prepayment of the
Partnership's investments. Increases in interest rates may decrease the proceeds
from a sale of the MBS.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1)Principal Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(99.2)Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
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 13, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Insured Plus II Limited
Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Douglas Krupp, Co-Chariman (Principal Executive Officer),
President and Director of Krupp Plus Corporation, a General Partner of the
Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership as of June 30, 2002 (the last
date of the period covered by the Report).
/ s / Douglas Krupp
Douglas Krupp,
Principal Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Insured Plus II Limited
Partnership (the "Partnership") on Form 10-Q for the period ending June 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert A. Barrows, Chief Accounting Officer of Krupp Plus
Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership as of June 30, 2002 (the last
date of the period covered by the Report).
/ s / Robert A. Barrows
- ----------------------------
Robert A. Barrows,
Chief Accounting Officer