UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-16817
Krupp Insured Plus-II Limited Partnership
Massachusetts 04-2955007
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
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.
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KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
BALANCE SHEETS
----------
ASSETS
September 30, December 31,
2002 2001
------------- ------------
Participating Insured Mortgages ("PIMs") (Note 2) $ -- $ 3,101,005
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 14,017,812 30,211,162
------------ ------------
Total mortgage investments 14,017,812 33,312,167
Cash and cash equivalents 1,355,396 933,678
Interest receivable and other assets 97,842 221,124
------------ ------------
Total assets $ 15,471,050 $ 34,466,969
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 15,938 $ 17,875
------------ ------------
Partners' equity (deficit) (Note 4):
Limited Partners
(14,655,512 Limited Partner
interests outstanding) 15,618,697 34,084,355
General Partners (350,448) (341,667)
Accumulated comprehensive income 186,863 706,406
------------ ------------
Total Partners' equity 15,455,112 34,449,094
------------ ------------
Total liabilities and Partners' equity $ 15,471,050 $ 34,466,969
============ ============
The accompanying notes are an integral
part of the financial statements.
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KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Interest income - PIMs:
Basic interest $ -- $ 62,349 $ 183,038 $ 551,049
Participation interest -- -- -- 30,769
Interest income - MBS 270,662 576,176 1,308,622 1,452,918
Other interest income 55,137 23,899 84,737 116,705
----------- ----------- ----------- -----------
Total revenues 325,799 662,424 1,576,397 2,151,441
----------- ----------- ----------- -----------
Expenses:
Asset management fee to an affiliate 26,430 62,792 132,347 199,532
Expense reimbursements to affiliates 33,918 31,230 92,313 87,936
Amortization of prepaid fees and
expenses -- 17,972 -- 65,905
General and administrative 46,477 84,288 142,739 145,781
----------- ----------- ----------- -----------
Total expenses 106,825 196,282 367,399 499,154
----------- ----------- ----------- -----------
Net income 218,974 466,142 1,208,998 1,652,287
Other comprehensive income:
Net change in unrealized gain on MBS (1,143) 319,535 (519,543) 695,920
----------- ----------- ----------- -----------
Total comprehensive income $ 217,831 $ 785,677 $ 689,455 $ 2,348,207
=========== =========== =========== ===========
Allocation of net income (Note 4):
Limited Partners $ 212,405 $ 452,157 $ 1,172,728 $ 1,602,718
=========== =========== =========== ===========
Average net income per Limited Partner
interest (14,655,512 Limited Partner
interests outstanding) $ .01 $ .03 $ .08 $ .11
=========== =========== =========== ===========
General Partners $ 6,569 $ 13,985 $ 36,270 $ 49,569
=========== =========== =========== ===========
The accompanying notes are an integral
part of the financial statements.
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KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
----------
For the Nine Months
Ended September 30,
----------------------------
2002 2001
------------ ------------
Operating activities:
Net income $ 1,208,998 $ 1,652,287
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of prepaid fees and expenses -- 65,905
Premium amortization -- 29,746
Changes in assets and liabilities:
Decrease in interest receivable and other assets 123,282 50,427
Increase (decrease) in liabilities (1,937) 136,223
------------ ------------
Net cash provided by operating activities 1,330,343 1,934,588
------------ ------------
Investing activities:
Principal collections on PIMs 3,101,005 107,479
Principal collections on MBS 15,673,807 5,466,255
------------ ------------
Net cash provided by investing activities 18,774,812 5,573,734
------------ ------------
Financing activities:
Quarterly distributions (2,243,378) (4,451,752)
Special distributions (17,440,059) (4,543,209)
------------ ------------
Net cash used for financing activities (19,683,437) (8,994,961)
------------ ------------
Net increase (decrease) in cash and cash equivalents 421,718 (1,486,639)
Cash and cash equivalents, beginning of period 933,678 3,125,710
------------ ------------
Cash and cash equivalents, end of period $ 1,355,396 $ 1,639,071
============ ============
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 $ (519,543) $ 695,920
============ ============
The accompanying notes are an integral
part of the financial statements.
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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 September 30, 2002, its results
of operations for the three and nine months ended September 30, 2002 and
2001 and its cash flows for the nine months ended September 30, 2002 and
2001.
The results of operations for the three and nine months ended September
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 of
the Partnership to compensate the Partnership for its inability to collect
the 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. On August 28, 2002, the Partnership paid a
special distribution of $.97 per Limited Partner interest from the
principal proceeds received.
At September 30, 2002, the Partnership's MBS portfolio had an amortized
cost of $2,408,892 and gross unrealized gains of $186,863. At September
30, 2002, the Partnership's insured mortgage had an amortized cost of
$11,422,057 and a gross unrealized gain of $713,993. The portfolio has
maturities ranging from 2008 to 2028.
Continued
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KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
----------
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the nine months ended
September 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 1,172,728 36,270 -- 1,208,998
Quarterly distributions (2,198,327) (45,051) -- (2,243,378)
Special distributions (17,440,059) -- -- (17,440,059)
Change in unrealized gain on MBS -- -- (519,543) (519,543)
------------ ------------ ------------ ------------
Balance at September 30, 2002 $ 15,618,697 $ (350,448) $ 186,863 $ 15,455,112
============ ============ ============ ============
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and accompanying notes contained in the Partnership's 2001
Annual Report on Form 10-K and in this Form 10-Q.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this 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; prepayments 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 September 30, 2002, the Partnership had liquidity consisting of cash and cash
equivalents of approximately $1.4 million as well as the cash flow provided by
its investment in 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 representing $.05 per
Limited Partner interest. 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. Since all of the participating loans have been repaid, the
Partnership will commence closing out the Partnership by selling the remaining
assets in the Partnership. The General Partners anticipates that a final
liquidating distribution will be made in early 2003.
The Partnership received a payoff of the Richmond Park Apartments MBS on June
17, 2002 for $14,073,943. On August 28, 2002, the Partnership paid a special
distribution of $.97 per Limited Partner interest from the principal proceeds
received.
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 of the Partnership
to compensate the Partnership for its inability to collect the 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.
Results of Operations
Net income decreased in the three months ended September 30, 2002 as compared to
September 30, 2001 primarily due to decreases in MBS interest income and basic
interest on PIMs . This decrease was partially offset by an increase in other
interest income and decreases in general and administrative expenses and asset
management fees. Basic interest on PIMs decreased due to the payoff of the
Denrich Apartments PIM in May 2002. MBS interest decreased primarily due to the
payoff of the Richmond Park Apartments MBS in June 2002. Other interest income
increased due to higher average cash balances available for short-term investing
in the three-month period ended September 30, 2002 versus the same period last
year. The decrease in general and administrative expenses was due to the
Partnership not being billed for the third quarter 2001 processing costs. Due to
the delay, an estimate of these costs was recorded. This estimate was
approximately $15,000 too high and was adjusted in the fourth quarter of 2001.
Asset management fees decreased due to the decrease in the Partnership's
investments as a result of principal collections and payoffs.
Net income decreased in the nine months ended September 30, 2002 as compared to
September 30, 2001 primarily due to lower basic interest on PIMs and lower MBS
interest income This decrease 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. In 2001, the Partnership received a payment from the borrower of
the Richmond Park PIM as a settlement to release the loan's participation
feature. The Partnership continued to receive the scheduled payments on the
insured first mortgage and the classification of interest income was changed
from PIM interest
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income to MBS interest income. 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 and on-going single-family MBS
principal collections net of the effect of the Richmond Park reclassification.
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 nine months ended September 30, 2001 as compared
to September 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 MBS and an insured mortgage are guaranteed
and/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. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States with significant experience in mortgage securitizations. In
addition, their MBS instruments carry the highest credit rating given to
financial instruments. 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 September 30, 2002 the Partnership included in cash and cash equivalents
approximately $1.1 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
September 30, 2002, the Partnership's MBS and an insured mortgage 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 and insured mortgage.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Principal Executive Officer and Chief Accounting Officer of Krupp Plus
Corporation, a general partner of the Partnership, carried out an evaluation of
the effectiveness of the design and operation of the Partnership's disclosure
controls and procedures. Based upon that evaluation, the Principal Executive
Officer and the Chief Accounting Officer concluded that the Partnership's
disclosure controls and procedures were effective as of the date of their
evaluation in timely alerting them to material information relating to the
Partnership required to be included in this Quarterly Report on Form 10-Q.
(b) Changes in Internal Controls
There were no significant changes in the Partnership's internal controls or in
other factors that could significantly affect such internal controls subsequent
to the date of the evaluation described in paragraph (a) above.
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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 Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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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: November 11, 2002
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Certifications
I, Douglas Krupp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Krupp Insured
Plus - II Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Douglas Krupp
---------------------------
Douglas Krupp
Principal Executive Officer
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Certifications
I, Robert A. Barrows, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Krupp Insured
Plus - II Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Robert A. Barrows
------------------------
Robert A. Barrows
Chief Accounting Officer
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