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 guaranteed as to principal and basic interest. These MBS 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 (participation interest). 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, 2000, there were no personnel directly employed by the Partnership.
ITEM 2.
ITEM 2. PROPERTIES - ------
None
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------
None.
PART II
ITEM 5.
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, 2000 was approximately 12,800. 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 the realization and payout of the existing mortgages.
On March 30, 2000, the Partnership paid a special distribution of $.58 per Limited Partner interest from the prepayment proceeds received during February 2000 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 basic 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 interest from this transaction.
On January 11, 2000, the Partnership paid a special distribution of $.43 per Limited Partner interest from the Saratoga Apartments PIM prepayment proceeds received in December 1999 in the amount of $6,204,960. The underlying property value had not increased sufficiently to meet the criteria for the Partnership to earn any participation interest.
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.
The Partnership made the following distributions to its Partners during the two years ended December 31, 2000 and 1999:
ITEM 6.
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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------
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 $.10 per Limited Partner interest per quarter.
In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investments also may provide participation interest if the underlying properties 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.
On March 30, 2000, the Partnership paid a special distribution of $.58 per Limited Partner interest from the prepayment proceeds received during February 2000 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 basic 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 interest from this transaction.
On January 11, 2000, the Partnership paid a special distribution of $.43 per Limited Partner interest from the Saratoga Apartments PIM prepayment proceeds received in December 1999 in the amount of $6,204,960. The underlying property value had not increased sufficiently to meet the criteria for the Partnership to earn any participation interest.
On November 22, 1999, the Partnership paid a special distribution of $.72 per Limited Partner interest from the Le Coeur du Monde Apartments PIM prepayment proceeds received in October 1999 in the amount of $9,422,001. The Partnership also received $472,587 of accrued and unpaid participation interest attributable to property operations from its Le Coeur du Monde PIM investment and $1,102,701 of participation interest 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 Limited Partner interest from the Country Meadows Apartments PIM prepayment proceeds received in May 1999 in the amount of $12,015,224. The underlying property value had not increased sufficiently to meet the criteria for the Partnership to earn any participation interest. 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 Limited Partner interest from the prepayments of the Stanford Court, Hillside Court, Carlyle Court and Waterford Court Apartments PIMs. On January 25, 1999, the Partnership received prepayments of the Stanford Court, Hillside Court, Carlyle Court and Waterford Court Apartments 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.
The Partnership's only remaining PIM investments are the GNMA securities backed by the first mortgage loans on the Denrich and Richmond Park Apartments. 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 operated under a long term workout agreement with the Partnership that expired at the end of 2000. The General Partners anticipate the workout will be renegotiated and extended under similar terms during 2001.
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 participation interest from 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, borrowers 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 GNMA, Fannie Mae, FHLMC or 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 represent interests 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, 2000 the Partnership includes in cash and cash equivalents approximately $2.8 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, 2000, the Partnership's PIMs and MBS comprise the majority of the Partnership'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 distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs, 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 Partnership'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 ("WAIR") by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments.
Net income decreased during 2000 as compared to 1999 primarily due to lower basic and participation interest on PIMs. This was partially offset by a decrease in amortization. The reduction in basic interest on PIMs is due to the payoff of the Greenhouse PIM in 2000 and the payoffs of the Saratoga, Le Coeur du Monde, Country Meadows, Stanford Court, Hillside Court, Carlyle Court and Waterford Court PIMs in 1999. Participation interest was higher in 1999 than 2000 as the loans that paid off in 1999 generated higher Shared Appreciation Interest and prepayment premiums than the Greenhouse PIM which paid off in 2000. The decrease in amortization was also related to the payoff activity in 1999 which resulted in the write-off of the remaining deferred expenses attributed to those loans.
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 interest 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------
See Appendix A to this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------
None.
PART III
ITEM 10.
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:
Position with Name and Age Krupp Plus Corporation
Douglas Krupp (54) President, Co-Chairman of the Board and Director George Krupp (56) Co-Chairman of the Board and Director Peter F. Donovan (47) Senior Vice President Ronald Halpern (59) Senior Vice President Carol Mills (51) Vice President Robert A. Barrows (43) 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. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989.
George Krupp 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. Douglas and George Krupp are brothers.
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 11th largest commercial mortgage servicer in the United States with a servicing and asset management portfolio of $11.5 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. Mr. Donovan is currently a member of the Advisory Council for Fannie Mae.
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 which includes his experience as 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 Berkshire Mortgage Finance. She manages the estimated $11.5 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.
ITEM 11. EXECUTIVE COMPENSATION - -------
The Partnership has no directors or executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------
As of December 31, 2000, 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 Limited Partner interests. The only interests held by management or its affiliates consist of its General Partner and Corporate Limited Partner Interests.
ITEM 13.
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.
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 to this report.
2. Financial Statement Schedule - see Index to Financial Statements and Schedule included under Item 8, Appendix A, page 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)].*
Richmond Park Apartments
(10.5) 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)].*
(10.6) 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)]*
(10.7) 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, 2000, 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, 2001.
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, 2001.
Signatures Title(s)
/s/ Douglas Krupp President, Co-Chairman (Principal Executive Officer) - ------------------------- and Director of Krupp Plus Corporation, Douglas Krupp a General Partner
/s/ George Krupp Co-Chairman (Principal Executive Officer) - ------------------------- and Director of of Krupp Plus Corporation, George Krupp a General Partner
/s/ Peter F. Donovan Senior Vice President of Krupp Plus Corporation, - ------------------------- a General Partner
Peter F. Donovan
/s/ Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus - ------------------------- Corporation, a General Partner
Robert A. Barrows
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, 2000
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
All 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 financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Krupp Insured Plus- II Limited Partnership (the "Partnership") at December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of America 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.
PricewaterhouseCoopers LLP Boston, Massachusetts March 23, 2001
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
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 Limited Partner interests on May 29, 1987 and completed its public offering having sold 14,655,412 Limited Partner interests for $292,176,381 net of purchase volume discounts of $931,859 as of May 27, 1988. In addition, Krupp Depository Corporation owns one hundred Limited Partner interests.
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).
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles.
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.
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 PIMs 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 amortized prepaid participation servicing fees using a method that approximated the effective interest method over a ten-year period beginning at final endorsement of the loan.
Upon the repayment of a PIM, any unamortized acquisition fees and expenses and unamortized participation servicing fees related to such loan are expensed.
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, 2000 and 1999, the Partnership had investments in two PIMs and three 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 and (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
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS ---------------
C. PIMs, continued
Income Interest from the operations of the property is limited to 50% of net revenue or Surplus Cash as defined by HUD.
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.
On March 30, 2000, the Partnership paid a special distribution of $.58 per Limited Partner interest from the prepayment proceeds received during February 2000 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 basic 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 interest from this transaction.
On January 11, 2000, the Partnership paid a special distribution of $.43 per Limited Partner interest from the Saratoga Apartments PIM prepayment proceeds received in December 1999 in the amount of $6,204,960. The underlying property value had not increased sufficiently enough to meet the criteria for the Partnership to earn any participation interest.
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 Interest 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 Apartments PIMs. The Partnership received principal of $27,967,284 during January 1999, 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.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS --------------- C. PIMs, continued
On October 19, 1998, the Partnership received a prepayment on the Walden Village Apartments 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.
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, 2000 and 1999 there were no loans within the Partnership's portfolio that were delinquent as to principal or interest.
The Partnership's PIMs consisted of the following at December 31, 2000 and 1999:
(a) Represents the permanent interest rate of the GNMA MBS. In addition, the Partnership receives participation interest consisting of (i) Minimum Additional Interest, (ii) Shared Income Interest and (iii) Shared Appreciation Interest.
(b) Minimum Additional Interest is at a rate of .5% per annum calculated on the unpaid principal balance of the first mortgage note.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
C. PIMs, continued
(c) Minimum Additional Interest was at a rate of .75% per annum calculated on the unpaid principal balance of the first mortgage note.
(d) Shared Income Interest is based on 25% of monthly gross rental income over a specified base amount.
(e) Shared Appreciation Interest is based on 25% of any increase in the value of the project over the specified base value.
(f) The Partnership's GNMA MBS have call provisions, which allow the Partnership to accelerate their respective maturity date.
(g) 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 premium in years six through nine, a 1% prepayment premium in year ten and no prepayment premium after year ten.
(h) 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 interest to the Partnership. Also under the agreement, the Base Value for calculating Shared Appreciation Interest decreased from $4,025,000 to $3,500,000.
(i) The Partnership holds a 62% interest in this PIM while the remaining portion is held by Krupp Insured Mortgage Limited Partnership, an affiliate.
(j) The aggregate cost of PIMs for federal income tax purposes is $17,541,596.
A reconciliation of the carrying value of PIMs for each of the three years in the period ended December 31, 2000 is as follows:
The underlying mortgages of the PIMs are collateralized by multi-family apartment complexes located in 2 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, 2000, the Partnership's MBS portfolio has an amortized cost of $9,407,384 and unrealized gains and losses of $233,123 and $40,460, respectively. At December 31, 2000, the Partnership's insured mortgage had an amortized cost of $11,647,599 and an unrealized gain of $203,833. At December 31, 1999, the Partnership's MBS portfolio had an amortized cost of $10,409,242 and unrealized gains and losses of $247,471 and $142,390, respectively. At December 31, 1999, the Partnership's insured mortgage had an amortized cost of $11,763,633 and an unrealized loss of $126,930. The portfolio has maturities ranging from 2007 to 2030.
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 2000, 1999 and 1998 the Partnership made quarterly distributions totaling $.40, $.76 and $1.12 per Limited Partner interest, respectively. The Partnership made special distributions of $1.01, $3.52 and $3.87 per Limited Partner interest in 2000, 1999 and 1998, respectively.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
E. Partners' Equity, continued
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 Distributable Cash Flow 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 the preparation and mailing of financial reports, tax information and other communications to investors and legal fees and expenses.
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 2000 federal income tax return is as follows:
For the years ended December 31, 2000, 1999 and 1998 the average per unit net income to the Unitholders for federal income tax purposes was $.15, $.33 and $.68 respectively.
The basis of the Partnership's assets for financial reporting purposes is less than its tax basis by approximately $929,000 and $1,523,000 at December 31, 2000 and 1999, respectively. The basis of the Partnership's liabilities for financial reporting purposes are the same as its tax basis at December 31, 2000 and 1999, 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 $437,000 and $40,000 at December 31, 2000 and $247,000 and $269,000 at December 31, 1999.
Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
H. Fair Value Disclosures of Financial Instruments, continued -----------------------------------------------
PIMs
As 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 as 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 $46,000 at December 31, 2000 and gross unrealized gains of approximately $478,000 at December 31, 1999.
At December 31, 2000 and 1999, the estimated fair values of the Partnership's financial instruments are as follows (amounts rounded to nearest thousand):
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, 2000 and the period from inception through December 31, 2000. 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.
(a) Represents all distributions paid in 2000 except the January 2000 special distribution and the February 2000 quarterly distribution and includes an estimate of the quarterly distribution to be paid in February 2001. (b) Includes an estimate of the quarterly distribution to be paid in February 2001. (c) Limited Partners average per Unit return of capital as of February 2001 is $15.29 [$28.19 - $12.90] 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.