-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J78DAvShP1zkN+3TexfpuPaOueK5UtsztFV77zTAqcNiKAErs8OBUIvISsFE7gqk P2srWFxOXDnL5x3nFPO/gw== 0000805297-98-000002.txt : 19980331 0000805297-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0000805297-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP INSURED PLUS II LTD PARTNERSHIP CENTRAL INDEX KEY: 0000805297 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 042955007 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16817 FILM NUMBER: 98577454 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232233 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESx EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-16817 Krupp Insured Plus-II Limited Partnership (Exact name of registrant as specified in its charter) Massachusetts 04-2955007 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (617) 423-2233 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Depositary Receipts representing Units of Limited Partner Interests Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. Aggregate market value of voting securities held by non-affiliates: Not applicable, as securities are non-voting. Documents incorporated by reference: See Part IV, Item 14 The exhibit index is located on pages 8-12. PART I This form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21e of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. ITEM 1. BUSINESS Krupp Insured Plus-II Limited Partnership (the "Partnership") is a Massachusetts limited partnership which was formed on October 29, 1986. The Partnership raised approximately $292 million through a public offering of limited partner interests evidenced by units of depositary receipts ("Units") and used the investable proceeds primarily to acquire participating insured mortgages ("PIMs") and mortgage-backed securities ("MBS"). The Partnership considers itself to be engaged only in the industry segment of investment in mortgages. The Partnership's investments in PIMs on multi-family residential properties consist of a MBS or an insured mortgage loan (collectively, the "insured mortgage") guaranteed or insured as to principal and basic interest. These insured mortgages were issued or originated under or in connection with the housing programs of the Federal National Mortgage Association ("FNMA"), the Government National Mortgage Association ("GNMA") or the Department of Housing and Urban Development ("HUD"). PIMs provide the Partnership with monthly payments of principal and interest and also provide for Partnership participation in the current revenue stream and in residual value, if any, from a sale or other realization of the underlying property. The borrower conveys these rights to the Partnership through a subordinated promissory note and mortgage. The participation features are neither insured nor guaranteed. The Partnership also acquired MBS and insured mortgages collateralized by single-family or multi-family mortgage loans issued or originated by GNMA, FNMA, HUD or the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA and FHLMC guarantee the principal and basic interest of the FNMA and FHLMC MBS, respectively. GNMA guarantees the timely payment of principal and 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, 1997, there were no personnel directly employed by the Partnership. -4- ITEM 2. PROPERTIES None ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or to which any of its investments is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There currently is no established trading market for the Units. The number of investors holding Units as of December 31, 1997 was approximately 15,000. One of the objectives of the Partnership is to provide quarterly distributions of cash flows generated by its investments in mortgages. The Partnership anticipates that future operations will continue to generate cash available for distribution. Adjustments may be made to the distribution rate in the future due to realization and payout of the existing mortgages. The Partnership made the following distributions, to its Partners during the two years ended December 31, 1997 and 1996:
1997 1996 Amount Per Unit Amount Per Unit Distributions: Limited Partners $16,414,173 $1.12 $16,414,171 $1.12 General Partners 436,626 432,214 $16,850,799 $16,846,385 Special Distributions: Limited Partners 24,767,815 $1.69 $ - - Total Distributions $41,618,614 $16,846,385
ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Supplementary Data, which are included in Item 7 and Item 8, (Appendix A) of this report, respectively. -5-
1997 1996 1995 1994 1993 Total revenues $ 16,672,558 $ 15,855,280 $ 16,366,468 $ 18,874,538 $ 19,209,240 Net income 12,972,600 12,331,212 12,656,200 14,147,772 14,525,508 Net income allocated to: Limited Partners 12,583,422 11,961,276 12,276,514 13,723,339 14,089,743 Average per Unit .86 .82 .84 .94 .96 General Partners 389,178 369,936 379,686 424,433 435,765 Total assets at December 31 180,126,977 207,552,419 212,789,466 215,697,082 241,054,891 Distributions to: Limited Partners 16,414,173 16,414,171 16,414,173 21,738,336 23,432,667 Average per Unit 1.12 1.12 1.12 1.48 1.60 Special 24,767,815 - - 17,293,504 2,637,993 Average per Unit 1.69 - - 1.18 .18 General Partners 436,626 432,214 430,359 476,952 472,189
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management s expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources The most significant demands on the Partnership's liquidity are regular quarterly distributions paid to investors of approximately $4.1 million. Funds used for investor distributions are generated from interest income received on the PIMs, MBS, cash and short-term investments, and the principal collections received on the PIMs and MBS. The Partnership funds a portion of the distribution from principal collections, causing the capital resources of the Partnership to continually decrease. As a result of this decrease, the total cash inflows to the Partnership will also decrease, which will result in periodic downward adjustments to the distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment to the distribution rate 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 of cash available for distribution. To the extent quarterly distributions differ from the cash available for distribution, the General Partners may adjust the distribution rate or distribute funds through a special distribution. The General Partners believe the Partnership can maintain the current distribution rate for the near future. However, in the event of PIM prepayments, the Partnership would be required to distribute any proceeds from the prepayments as a special distribution, which may cause an adjustment to the distribution rate to reflect the anticipated future cash inflows from the remaining mortgage investments. During 1997, the Partnership received six prepayments; three multi-family MBS in the amounts of $2,318,901, $2,425,094 and $2,824,583 and three PIMs in the amounts of $9,935,167, $2,520,805 and $4,161,080 from Lakeside Apartments, Colonial Apartments and Pine Ridge Apartments PIMs, respectively. In addition, the Partnership also collected either Shared Appreciation Interest or prepayment penalty and Shared Interest Income related to the PIM prepayments totaling $602,856 and $450,216, respectively. In June 1997, the Lakeside Apartments PIM was repaid when the borrower refinanced the property. In addition to the outstanding balance due on the first mortgage, the Partnership received approximately $570,000 of additional interest from property operations $471,000 and a $99,000 prepayment penalty. In June 1997, the Partnership made a special distribution of $.71 per Limited Partner interest resulting from the repayment of the Lakeside Apartments PIM. In October 1997, the Colonial Park Apartments PIM was repaid when the borrower refinanced the property. In addition to the outstanding balance due on the first mortgage, the Partnership received approximately a prepayment penalty $25,000 and $14,000 of Shared Income Interest. During November 1997, the Partnership combined two of the three MBS prepayments and the Colonial Park prepayment and made a special distribution of $.50 to the Limited Partners. In November 1997, the Pine Ridge Apartments PIM was repaid by the borrower. In addition to the outstanding balance due on the first mortgage, the Partnership received approximately $243,000 of Shared Appreciation Interest and $284,000 of Shared Income Interest. During December 1997, the Partnership combined the remaining MBS prepayment with the Pine Ridge PIM prepayment and made a special distribution of $.48 to the Limited Partners. During 1997, the owner of Lily Flagg began positioning the property for a 1998 sale or refinancing, and for marketing purposes asked the General Partner to permit a prepayment of the PIM participation feature. The General Partner agreed to accept $437,963 for payment of all participation interest earned through the third quarter 1997 and converted the Partnership's investment into a multi-family insured mortgage. The General Partner expects this loan as well as a number of other PIMs will be prepaid in 1998 as owner sell or refinance their properties. -7- During the first quarter of 1998, the Partnership received the principal repayments of the Fallwood, Greenbriar and Westbrook PIMs totaling $13,543,399 when the owner of all three properties refinanced his properties' debt. The Partnership received all unpaid Minimum Additional Interest and Shared Income Interest owed on all three deals totaling $619,893 as well as Shared Appreciation Interest totaling $281,376. The Partnership will distribute the capital proceeds from these three transactions to investors through a special distribution in March of 1998. The General Partners are closely monitoring the bankruptcy proceedings of the borrower of the Greenhouse Apartments PIM. Upon resolution of the bankruptcy, the Partnership will receive the outstanding principal of the Greenhouse Apartments PIM either as a prepayment or an insurance claim and then distribute these proceeds to investors as a special distribution. The General Partners do not anticipate receiving any participation interest income from this PIM. For the first five years of the PIMs the borrowers are prohibited from prepaying. For the second five years, the borrowers can prepay the loans and pay the greater of a prepayment penalty or all participation interest that would be due as of the date of prepayment. The participation features of the PIMs are neither insured nor guaranteed and if prepayment of a PIM results from an insurance claim the Partnership would not receive any prepayment penalty nor any participation interest. The Partnership has the option to call certain PIMs by accelerating their maturity if the loans are not prepaid by the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Factors such as the condition of the asset, local market conditions, interest rates and available financing will have an impact on this decision. -8- Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by the Government National Mortgage Association ( GNMA ), the Federal National Mortgage Association ( FNMA ), 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. FNMA is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the timely payment of principal and basic interest on the securities it issues, which represents interest in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government. Operations The following discussion relates to the operation of the Partnership during the years ended December 31, 1997, 1996 and 1995.
(Amounts in thousands) 1997 1996 1995 Interest income on PIMs: Base interest $11,090 $12,070 $12,198 Participation interest income 1,816 32 250 Interest income on MBS and insured mortgages 3,099 3,366 3,573 Other interest income 668 387 346 Partnership expenses (1,793) (1,778) (1,964) Amortization of prepaid fees and expenses (1,907) (1,746) (1,747) Net Income $12,973 $12,331 $12,656
Net income increased during 1997 as compared to 1996 by approximately $642,000. This increase was primarily due to higher participation income, offset partially by lower base interest and higher amortization expense directly related to the prepayments of the Lakeside, Colonial and Pine Ridge Apartment PIMs. Base interest income on PIMs decreased by approximately $980,000 in 1997 as compared to 1996 as a result of prepayments on three PIMs and a general reduction in the invested assets in the Partnership attributed to the receipt of principal payments. Subsequently, special distributions were made from the Partnership using the prepayment proceeds. An increase in participation interest income of $1,784,000 was primarily a result of receiving Shared Appreciation Interest and prepayment penalities totaling $603,000 and Shared Income Interest of $507,000 from the prepayments of the Lakeside, Colonial Park and Pine Ridge Apartments PIMs and Shared Income Interest of $706,000 from seven of the Partnership s PIMs. Interest income on MBS and insured mortgages declined approximately $267,000 due to principal collections and prepayments reducing the outstanding MBS portfolio. Interest income on MBS and base interest income on PIMs will continue to decline as principal collections reduce the outstanding balance of these investments. 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 interest income. Net income decreased slightly in 1996 as compared to 1995 due primarily to lower PIM base interest and MBS interest income offset by lower Partnership expenses. The Partnership funds a portion of distributions with MBS and PIM principal collections which reduces the invested assets generating interest income for the Partnership. As invested assets decline so will interest income on MBS and base interest income on PIMs. Partnership expenses declined due to lower general and administrative expenses and a reduction in reimbursements paid to affiliates in connection with maintaining the books and records of the Partnership as well as the preparation and mailing of investor communications. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Appendix A to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Information as to the directors and executive officers of Krupp Plus Corporation which is a General Partner of the Partnership and is the general partner of Mortgage Services Partners Limited Partnership, which is the other General Partner of the Partnership, is as follows: Position with Name and Age Krupp Plus Corporation Douglas Krupp (51) President, Co-Chairman of the Board and Director George Krupp (53) Co-Chairman of the Board and Director Peter F. Donovan (44) Senior Vice President Robert A. Barrows (40) Vice President and Treasurer Douglas Krupp and George Krupp are Co-Founders of The Berkshire Group. Established in 1969 as the Krupp Companies and headquartered in Boston, the Berkshire Group is a privately held real estate-based firm that has expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking and healthcare facility management. The Berkshire Group s interests include ownership of a mortgage company specializing in commercial mortgage financing with a portfolio of approximately $4.5 billion. In addition, The Berkshire Group has a majority ownership interest in Harborside Healthcare (NYSE-HBR), a long-term and subacute care company and a significant ownership interest in Berkshire Realty Company, Inc. (NYSE-BRI), a real estate investment trust specializing in apartment investments. Douglas Krupp is a graduate of Bryant College. In 1989 he received an honorary Doctor of Science in Business Administration from this institution and was elected trustee in 1990. Douglas Krupp is Chairman of The Berkshire Group, Chairman of the Board and a Director of both Berkshire Realty Company, Inc. and Harborside Healthcare. Mr. Krupp also serves as Chairman of the Board and Trustee of both Krupp Government Income Trust and Krupp Government Income Trust II. George Krupp received his undergraduate education from the University of Pennsylvania and Harvard University Extension School and holds a Master s Degree in History from Brown University. Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance and oversees the strategic growth plans of this mortgage banking firm which is the 12th largest in the United States based on servicing and asset management of a $4.4 billion loan portfolio. Previously he served as President of Berkshire Mortgage Finance and directed the production, underwriting and 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. 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, management information systems and loan closing and servicing 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. ITEM 11. EXECUTIVE COMPENSATION The Partnership has no directors or executive officers. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1997, no person owned of record or was known by the General Partners to own beneficially more than 5% of the Partnership's 14,655,412 outstanding Units. The only interests held by management or its affiliates consist of its General Partner and Corporate Limited Partner Interests. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this Item is contained in Note F to the Partnership's Notes To Financial Statements presented in Appendix A to this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -11- (a)1. Financial Statements - see Index to Financial Statements and Schedule included under Item 8, Appendix A, page F-2 to this report. 2. Financial Statement Schedule - see Index to Financial Statements and Schedule included under Item 8, Appendix A, page F-2 to this report. All other schedules are omitted as they are not applicable, not required or the information is provided in the Financial Statements or the Notes thereto. (b) Exhibits: Number and Description Under Regulation S-K The following reflects all applicable Exhibits required under Item 601 of Regulation S-K: (4) Instruments defining the rights of security holders including indentures: (4.1) Amended and Restated Agreement of Limited Partnership dated as of May 29, 1987 [Exhibit A to Prospectus included in Post Effective Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated June 18, 1987 (File No. 33- 9889)].* (4.2) Second Amendment to Agreement of Limited Partnership dated as of June 17, 1987 [Exhibit 4.6 in Post Effective Amendment No. l of Registrant's Registration Statement on Form S-11 dated June 18, 1987 (File No. 33-9889)].* (4.3) Subscription Agreement whereby a subscriber agrees to purchase Units and adopts the provisions of the Amended and Restated Agreement of Limited Partnership [Exhibit D to Prospectus included in Post Effective Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated June 18, 1987 (File No. 33-9889)].* (4.4) Copy of Amended Certificate of Limited Partnership filed with the Massachusetts Secretary of State on April 28, 1987. [Exhibit 4.4 in Amendment No. 1 of Registrant's Registration Statement on Form S- 11 dated May 14, 1987 (File No. 33-9889)].* (10) Material Contracts: (10.1) Form of agreement between the Partnership and Krupp Mortgage Corporation. [Exhibit 10.3 in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated May 14, 1987 (File No. 33-9889)].* Westbrook Manor Apartments (10.2) Prospectus for GNMA Pool No. 256059 (PL). [Exhibit 19.6 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988 (File No. 0- 16817)].* (10.3) Subordinated Multi-Family Deed of Trust (including Subordinated Promissory Note) dated April 19, 1988 between Wiston XXIII Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.7 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988 (File No. 0-16817)].* Le Coeur du Monde Apartments (10.4) Prospectus for GNMA Pools No. 257721 (CS) and 257722 (PN). [Exhibit 19.10 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988 (File No. 0-16817)].* (10.5) Subordinated Multi-Family Open-End Deed of Trust (including Subordinated Promissory Note) dated May 11, 1988 between Le Coeur du Monde Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.11 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988 (File No. 0-16817)].* Harbor House Apartments (10.6) Prospectus for GNMA Pools No. 257723 (CS) and 257724 (PN). [Exhibit 19.12 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988 (File No. 0-16817)].* (10.7) Subordinated Multi-family Mortgage (including Subordinated Promissory Note) dated May 11, 1988 between Harbor House Apartment Homes Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.13 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988 (File No. 0-16817)].* Fallwood Apartments (10.8) Prospectus for GNMA Pool No. 260300 (PL). [Exhibit 19.14 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1988 (File No. 0-16817)].* (10.9) Multifamily Mortgage (including Subordinated Promissory Note) dated June 23, 1988 between Wiston XVIII Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.15 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1988 (File No. 0-16817)].* -13- Greenbrier Apartments (10.10) Prospectus for GNMA Pool No. 260301 (PL). [Exhibit 19.16 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1988 (File No. 0-16817)].* (10.11) Multifamily Mortgage (including Subordinated Promissory Note) dated August 16, 1988 between Wiston XVI Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.17 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1988 (File No. 0- 16817)].* Country Meadows Apartments (10.12) Prospectus for GNMA Pools No. 260733 (CL) and 260734 (PN). [Exhibit 19.18 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1988 (File No. 0-16817)].* (10.13) Subordinated Multifamily Deed of Trust (including Subordinated Promissory Note) dated June 15, 1988 between Country Meadows Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.19 to Registrant's Report on Form 10-Q for the quarter ended September 30, 1988 (File No. 0-16817)].* Denrich Apartments (10.14) 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)].* (10.15) 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)].* (10.16) Modification Agreement dated June 28, 1995 between Arthur J. Stagnaro and Krupp Insured Plus-II Limited Partnership [Exhibit 10.1 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-16817)].* The Greenhouse (10.17) Prospectus for GNMA Pools No. 259233(CS) and 259234(PN) [Exhibit 19.1 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16817)].* (10.18) Subordinated Multifamily Deed of Trust (including Subordinated Promissory Note) dated January 5, 1989 between Farnam Associates Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.2 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0- 16817)].* Walden Village Apartments (10.19) Subordinated Multifamily Open-End Mortgage (including Subordinated Promissory Note) dated February 23, 1989 between The Walden Village Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.3 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16817)].* (10.20) Participation Agreement dated February 23, 1989 between The Centralbanc Mortgage Company and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.4 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16817)].* Longwood Villas Apartments (10.21) Prospectus for GNMA Pool No. 272539(PL). [Exhibit 19.7 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1989 (File No. 0-16817)].* (10.22) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated March 29, 1989 between Daniel Properties XI Limited Partnership and Krupp Insured Plus-II Limited Partnership. [Exhibit 19.8 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1989 (File No. 0- 16817)].* (10.23) Guaranty Agreement dated April 19, 1994 between SCA-Florida Holdings (I) Incorporated and Krupp Insured Plus-II Limited Partnership. [Exhibit 10.29 to Registrant's Report on Form 10-K for the year ended December 31, 1994 (File No. 0-16317)]* (10.24) Agreement of Release, Assumption and Modification of Subordinated Promissory Note and Subordinated Mortgage by and among Daniel Properties XI Limited Partnership, SCA-Florida Holdings (I) Incorporated and Krupp Insured Plus-II Limited Partnership. [Exhibit 10.30 to Registrant's Report on Form 10-K for the year ended December 31, 1994 (File No. 0- 16817)].* -15- Lily Flagg Station (10.25) Prospectus for GNMA Pool No 272540(PL). [Exhibit 19.9 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1989 (File No. 0-16817)].* Richmond Park Apartments (10.26) 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)].* (10.27) 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)]* (10.28) 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)].* Saratoga Apartments (10.29) Prospectus for GNMA Pool No. 280643 (Pl) [Exhibit 4 to Registrant's Report on Form 8-K dated August 30, 1989 (File No. 0-16817)].* (10.30) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated July 27, 1989 between American National Bank and Trust Company of Chicago, as Trustee and Krupp Insured Mortgage Limited Partnership. [Exhibit 5 to Registrant's Report on Form 8-K dated August 30, 1989 (File No. 0-16817)].* (10.31) Participation Agreement dated July 31, 1989 between Krupp Insured Plus-II Limited Partnership and Krupp Insured Mortgage Limited Partnership. [Exhibit 6 to Registrant's Report on Form 8-K dated August 30, 1989 (File No. 0-16817)].* Carlyle Court (10.32) Prospectus for FNMA Pool No. MX-073004 [Exhibit 10.50 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (file No. 0-16817)].* (10.33) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated September 26, 1989 between Carlyle-XI, L.P. an Indiana limited partnership and Krupp Insured Plus-II Limited Partnership [Exhibit 10.51 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-16817)].* Hillside Court (10.34) Prospectus for FNMA Pool No. MX-073003 [Exhibit 10.52 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-16817)].* (10.35) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated September 16, 1989 between Hillside Limited Partnership-IX, an Indiana limited partnership and Krupp Insured Plus-II Limited Partnership [Exhibit 10.53 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0- 16817)].* Stanford Court (10.36) Prospectus for FNMA Pool No. MX-073002 [Exhibit 10.54 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-16817)].* (10.37) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated September 26, 1989 between Hillside Limited Partnership-IX, an Indiana limited partnership and Krupp Insured Plus-II Limited Partnership [Exhibit 10.55 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0- 16817)].* Waterford Court (10.40) Prospectus for FNMA Pool No. MX-073005 [Exhibit 10.56 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-16817)].* (10.41) Subordinated Multifamily Mortgage (including Subordinated Promissory Note) dated September 26, 1989 between Waterford-VIII, an Indiana limited partnership and Krupp Insured Plus-II Limited Partnership [Exhibit 10.57 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-16817)].* * Incorporated by reference. -17- (c) Reports on Form 8-k During the last quarter of the year ended December 31, 1997, the Partnership did not file any reports on Form 8-K. -18- 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 2nd day of February, 1998. 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 2nd day of February, 1998. Signatures Title(s) /s/ Douglas Krupp President, Co-Chairman (Principal Executive Douglas Krupp Officer) and Director of Krupp Plus Corporation, a General Partner /s/ George Krupp Co-Chairman (Principal Executive Officer) George Krupp and Director of Krupp Plus Corporation, a General Partner /s/ Peter F. Donovan Senior Vice President of Krupp Plus Peter F. Donovan Corporation, a General Partner /s/ Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Robert A. Barrows Plus Corporation, a General Partner -19- 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, 1997 F-1 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Accountants F-3 Balance Sheets at December 31, 1997 and 1996 F-4 Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 F-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 1997, 1996 and 1995 F-6 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-7 Notes to Financial Statements F-8 - F-15 Schedule IV - Mortgage Loans on Real Estate F-16 - F-19 All other schedules are omitted as they are not applicable or not required, or the information is provided in the financial statements or the notes thereto. F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Insured Plus-II Limited Partnership: We have audited the financial statements and the financial statement schedule of Krupp Insured Plus-II Limited Partnership (the "Partnership") listed in the index on page F-2 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Krupp Insured Plus-II Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts February 2, 1998, except as to the information presented in Note I, for which the date is February 17, 1998
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 Participating Insured Mortgages ("PIMs") (Notes B, C, H and I) $122,048,053 $151,717,926 Mortgage-Backed Securities and multi-family insured mortgages("MBS") (Notes B, D and H) 44,727,693 41,283,769 Total mortgage investments 166,775,746 193,001,695 Cash and cash equivalents (Notes B, H and I) 9,052,480 7,921,270 Interest receivable and other assets 1,180,660 1,604,301 Prepaid acquisition fees and expenses, net of accumulated amortization of $8,293,080 and $8,279,914 respectively (Note B) 2,481,160 3,888,963 Prepaid participation servicing fees, net of accumulated amortization of $2,707,314 and $2,629,406, respectively (Note B) 636,931 1,136,190 Total assets $180,126,977 $207,552,419 LIABILITIES AND PARTNERS' EQUITY Liabilities 25,588 $ 18,900 Partners' equity (deficit) (Notes A, E and I): Limited Partners 178,597,484 207,196,050 (14,655,512 Units outstanding) General Partners (265,315) (217,867) Unrealized gain on MBS (Note B) 1,769,220 555,336 Total Partners' equity 180,101,389 207,533,519 Total liabilities and Partners' equity $180,126,977 $207,552,419
The accompanying notes are an integral part of the financial statements. F-5
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Revenues: Interest income - PIMs: Base interest $11,089,440 $12,070,443 $12,198,330 Participation interest 1,816,364 31,948 249,812 Interest income - MBS 3,098,699 3,366,026 3,572,641 Other interest income 668,055 386,863 345,685 Total revenues 16,672,558 15,855,280 16,366,468 Expenses: Asset management fee to an affiliate (Note F) 1,365,013 1,458,207 1,487,312 Expense reimbursement to affiliates (Note F) 162,269 155,091 227,167 Amortization of prepaid expenses and fees (Note B) 1,907,062 1,746,476 1,746,477 General and administrative 265,614 164,294 249,312 Total expenses 3,699,958 3,524,068 3,710,268 Net income (Note G) $12,972,600 $12,331,212 $12,656,200 Allocation of net income (Note E): Limited Partners $12,583,422 $11,961,276 $12,276,514 Average net income per Limited Partner interest $ .86 $ .82 $ .84 (14,655,512 Limited Partner interests outstanding) General Partners $ 389,178 $ 369,936 $ 379,686
F-6 The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995 Total Limited General Unrealized Partners' Partners Partners Gains Equity Balance at December 31, 1994 $ 215,786,604 $(104,916) $ - $ 215,681,688 Net income 12,276,514 379,686 - 12,656,200 Distributions (16,414,173) (430,359) - (16,844,532) Unrealized gain on MBS - - 1,281,350 1,281,350 Balance at December 31, 1995 211,648,945 (155,589) 1,281,350 212,774,706 Net income 11,961,276 369,936 - 12,331,212 Distributions (16,414,171) (432,214) - (16,846,385) Change in unrealized gain - - (726,014) (726,014) Balance at December 31, 1996 207,196,050 (217,867) 555,336 207,533,519 Net income 12,583,422 389,178 - 12,972,600 Distributions (16,414,173) (436,626) - (16,850,799) Special distributions (24,767,815) - - (24,767,815) Change in unrealized gain - - 1,213,884 1,213,884 Balance at December 31, 1997 $ 178,597,484 $(265,315) $1,769,220 $ 180,101,389
F-8 The accompanying notes are an integral part of the financial statements.
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Operating activities: Net income $ 12,972,600 $ 12,331,212 $ 12,656,200 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premiums 231,706 - - Amortization of short-term investment discount - (13,630) (7,973) Amortization of prepaid expenses and fees 1,907,062 1,746,476 1,746,477 Shared Appreciation Income and prepayment penalties (602,856) - - Changes in assets and liabilities: Decrease in interest receivable and other assets 423,641 425,062 154,566 Increase (decrease) in liabilities 6,688 4,140 (634) Net cash provided by operating activities 14,938,841 14,493,260 14,548,636 Investing activities: Short-term investment - (488,210) (490,187) Principal collections and prepayments on MBS and insured mortgages 9,388,723 2,587,489 2,155,335 Principal collections and prepayments on PIMs including Shared Appreciation Income and prepayment penalties of $602,856 in 1997 18,422,260 1,211,435 1,113,310 Investment in MBS - - 27,909 Proceeds from sale of investment - 1,000,000 - Net cash provided by investing activities 27,810,983 4,310,714 2,806,367 Financing activities: Distributions (16,850,799) (16,846,385) (16,844,532) Special distributions (24,767,815) - - Net cash used for financing activities (41,618,614) (16,846,385) (16,844,532) Net increase in cash and cash equivalents 1,131,210 1,957,589 510,471 Cash and cash equivalents, beginning of year 7,921,270 5,963,681 5,453,210 Cash and cash equivalents, end of year $ 9,052,480 $ 7,921,270 $ 5,963,681 Supplemental disclosure of non-cash investing activities: Reclassification of investment in a PIM to a MBS $ 11,850,469 $ - $ -
The accompanying notes are an integral part of the financial statements. F-11 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 issued all of the General Partner Interests to Krupp Plus Corporation and Mortgage Services Partners Limited Partnership in exchange for capital contributions aggregating $3,000. The Partnership terminates on December 31, 2026, unless terminated earlier upon the occurrence of certain events as set forth in the Partnership Agreement. The Partnership commenced the public offering of Units on May 29, 1987 and completed its public offering having sold 14,655,412 Units for $292,176,381 net of purchase volume discounts of $931,859 as of May 27, 1988. B. Significant Accounting Policies The Partnership uses the following accounting policies for financial reporting purposes, which may differ in certain respects from those used for federal income tax purposes (Note G). MBS The Partnership, in accordance with Financial Accounting Standards Board s Special Report on 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. PIMs The Partnership accounts for the MBS portion of its PIM in accordance with FAS 115 under the classification of held to maturity. The Partnership carries the Government National Mortgage Association ( GNMA ) or Federal National Mortgage Association ( FNMA ) MBS at amortized cost. The Federal Housing Administration PIM is carried at amortized cost unless the General Partner of the Partnership believes there is an impairment in value, in which case a valuation allowance would be established in accordance with Financial Accounting Standards No. 114, Accounting by Creditors for impairment of a Loan, and Financial Accounting Standard No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. F-12 Basic interest on PIMs is recognized based on the stated rate of the Federal Housing Administration ("FHA") mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA or FNMA MBS. Participation interest is recognized as earned and when deemed collectible by the Partnership. KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued B. Significant Accounting Policies, Continued 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. Prepaid Expenses and Fees Prepaid expenses and fees consist of acquisition fees and expenses and participation servicing fees paid for the acquisition and servicing of PIMs. The Partnership amortizes prepaid acquisition fees and expenses using a method that approximates the effective interest method over a period of ten to twelve years, which represents the actual maturity or anticipated payoff of the underlying mortgage. The Partnership amortizes prepaid participation servicing fees using a method that approximates the effective interest method over a ten-year period beginning at final endorsement of the loan if a Department of Housing and Urban Development ("HUD") loan or GNMA loan and at closing if a FNMA loan. Income Taxes The Partnership is not liable for federal or state income taxes because Partnership income is allocated to the partners for income tax purposes. If the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and such an examination results in a change in Partnership taxable income, such change will be reported to the partners. Estimates and Assumptions The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the period. Actual results could differ from those estimates. C. PIMs The Partnership has investments in sixteen PIMs. Of the sixteen PIMs, five funded the construction of multi-family housing. The Partnership's PIMs consist of a GNMA or FNMA MBS representing the securitized first mortgage loan on the underlying property or a sole participation interest in a first mortgage loan originated under the FHA lending program on the underlying property (collectively the "insured mortgages"), 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 interest on the GNMA and FNMA MBS and HUD insures the first mortgage loan underlying the GNMA MBS and the FHA first mortgage loan. Continued C. PIMs, Continued 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 penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty thereafter. The Partnership may receive interest 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" ranging from 25% to 30% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent that it exceeds the amount of Minimum Additional Interest received during such month, (iii) "Shared Appreciation Interest" ranging from 25% to 30% of any increase in the value of the underlying property in excess of a specified base. Payment of Minimum Additional Interest and Shared Income Interest will be from the operations of the property and is limited to 50% of net revenue or surplus cash as defined by FNMA or HUD, respectively. The total amount of Minimum Additional Interest, Shared Income Interest and Shared Appreciation interest payable by the underlying borrower usually can not exceed 50% of any increase in value of the property. However, generally any net proceeds from a sale or refinancing will be available to satisfy any accrued but unpaid Shared Income or Minimum Additional Interest. 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. During the third quarter of 1997, the Partnership received a $437,963 payment for all additional interest earned on the Lily Flagg Apartments PIM through the date of release of participation rights. The Partnership then converted the investment in the PIM to an multi- family insured mortgage. On June 17, 1997, the Partnership received a prepayment of the Lakeside Apartments PIM. The Partnership received the outstanding principal balance of $9,935,167, a prepayment penalty of $99,000, shared appreciation interest of $235,000 and Shared Income Interest of $335,000. On June 27, 1997, the Partnership made a special distribution of $.71 per Unit to the Limited Partners with the proceeds from the outstanding principal proceeds, the prepayment penalty and the Shared Appreciation Interest. During the fourth quarter of 1996, the borrower of the Colonial Park Apartments PIM sold the property to a buyer that assumed the first mortgage loan and future obligations arising from the participation features. The Partnership received $35,000 as a discounted payoff of the accumulated participation interest then due from the original borrower. On October 15, 1997, the Partnership received a prepayment of The Colonial Park Apartments PIM. The Partnership received the outstanding first mortgage principal balance of $2,520,805 plus outstanding interest. The Partnership collected a prepayment penalty of approximately $25,000 and Shared Income Interest of $14,000 during the fourth quarter of 1997. On November 21, 1997, the Partnership made a special distribution of $.17 per unit to the Limited Partners with the proceeds from the outstanding principal proceeds and the prepayment penalty. In November 1997, the Pine Ridge Apartments PIM was repaid by the borrower. In addition to the outstanding balance due on the first mortgage of $4,161,080, the Partnership received approximately $243,000 of Shared Appreciation Interest and $284,000 of Shared Income Interest. On December 19, 1997, the Partnership made a special distribution of $.30 per Unit to the Limited Partners with proceeds from the outstanding principal proceeds and the Share Appreciation Interest. At December 31, 1997 and 1996 there were no loans within the Partnership s portfolio that were delinquent as to principal or interest. Listed in the chart is a summary of the Partnership's PIM investments. The Partnership's PIMs consisted of the following at December 31, 1997 and 1996:
Aggregate Number Permanent Original of PIMs Interest Maturity Investment Basis Issuer Principal at 12/31/97 Rate Range Date Range at December 31, 1997 1996 GNMA $ 91,074,860 11 (a) 6.25%-8.5% 4/23 - 4/31 $86,756,622 $116,109,644 (b)(c)(d) FNMA 30,015,000 4 7.25%-7.75% 10/99 28,271,601 28,552,155 FHA 7,220,800 1 8.55% 11/30 7,019,830 7,056,127 $128,310,660 16 $122,048,053 $151,717,926
(a) Includes two PIMs - Richmond Park and Saratoga - in which the Partnership holds a 62% and 50% interest, respectively, and the remaining portion is held by an affiliate of the Partnership. (b) The Partnership agreed to temporarily reduce the interest rate on the Harbor House PIM effective on March 1, 1992, for a period of thirty months at rates ranging from 6.75% to 7.75% per annum. Since then the rate has been 8.25% per annum. As consideration for this reduction, the Partnership increased its Minimum Additional Interest from .5% to .75% as well as reduced the Shared Appreciation Interest Base to $13,000,000 from $13,750,000. (c) In May 1993, the Partnership agreed to temporarily reduce the interest rate of the Le Couer du Monde PIM, retroactive to October 1, 1992. Continued C. PIMs, Continued The reduction lasted for thirty-six months and ranged from 6.375% to 8.125% per annum. The current interest rate is 8.25% per annum. Any unpaid interest is payable from the net proceeds from a sale or refinancing of the property. As consideration for this reduction, the Partnership increased its Shared Appreciation Interest rate from 30% to 35% and decreased the base value used for this calculation from $10,795,260 to $9,814,200. (d) On June 28, 1995, the Partnership entered into a temporary interest rate reduction agreement on the Denrich Apartments PIM. Beginning July 1, 1995, the interest rate decreased from 8% per annum to 6.25% per annum for thirty months, then will increase to 6.75% per annum for the following thirty-six month period and then increase to the original interest rate of 8% per annum. The difference between interest at the original interest rate and the reduced interest 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 level for calculating Shared Appreciation Interest decreased from $4,025,000 to $3,500,000. The underlying mortgages of the PIMs are collateralized by multi-family apartment complexes located in 10 states. The apartment complexes range in size from 80 to 736 units. D. MBS During the third and fourth quarter of 1997, the Partnership received prepayments on three multi-family MBS in the amounts of $2,318,901, $2,425,094 and $2,824,583. The Partnership made two special distributions of $.33 per unit per Limited Partner for the first two MBS prepayments and $.19 per unit per Limited Partner interest for the third MBS prepayment with the proceeds from these prepayments. F-18 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued At December 31, 1997, the Partnership's MBS portfolio had an amortized cost of $42,958,473 and unrealized gains of approximately $1,769,220. At December 31, 1996, the Partnership's MBS portfolio has an amortized cost of $40,728,433 and unrealized gains and losses of approximately $830,450 and $275,114, respectively. The Partnership's MBS have maturities ranging from 2007 to 2033. 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 underall 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 1997, 1996 and 1995, the Partnership made quarterly distributions totaling $1.12 per unit. During 1997, the Partnership made special distributions totaling $1.69 per Unit. As of December 31, 1997, the following cumulative partner contributions and allocations have been made since the inception of the Partnership:
Corporate Limited General Unrealized Unitholders Partner Partners Gain Total Capital $292,176,381 $ 2,000 $ 3,000 $ - $292,181,381 contributions Syndication costs (15,580,734) - - - (15,580,734) Quarterly (210,474,037) (1,472) (5,129,386) - (215,604,895) distributions Special (44,699,007) (305) - - (44,699,312) distributions Net income 157,173,558 1,100 4,861,071 - 162,035,729 Unrealized gain on MBS - - - 1,769,220 1,769,220 Total at December 31 1997 $178,596,161 $ 1,323 $ (265,315) $1,769,220 $180,101,389
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 F-20 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued the value of the Partnership's actual and committed mortgage assets, payable quarterly. The General Partners may also receive an incentive management fee in an amount equal to .3% per annum on the Partnership's total invested assets provided the Unitholders have received their specified non-cumulative annual return on their Invested Capital. Total fees payable to the General Partners for management services shall not exceed 10% of cash available for distribution over the life of the Partnership. Additionally, the Partnership reimburses affiliates of the General Partners for certain costs incurred in connection with maintaining the books and records of the Partnership and the preparation and mailing of financial reports, tax information and other communications to investors. G. Federal Income Taxes The reconciliation of the income reported in the accompanying financial statements with the income reported in the Partnership's 1997 federal income tax return is as follows: Net income per statement of income $12,972,600 Add: Book to tax difference for participation Income 183,826 Book to tax difference for amortization of prepaid expenses and fees (115,328) Net income for federal income tax purposes $13,041,098 The allocation of the 1997 net income for federal income tax purposes is as follows: Portfolio Income Unitholders $12,667,865 Corporate Limited Partner 86 General Partners 373,147 $13,041,098 For the years ended December 31, 1997, 1996 and 1995 the average per unit income to the Unitholders for federal income tax purposes was $.86, $.95 and $.84 respectively. The basis of the Partnership s assets for financial reporting purposes is less than its tax basis by approximately $2,892,000 and $4,038,000 at December 31, 1997 and 1996, respectively. The basis of the Partnership s liabilities for financial reporting purposes are the same for its tax basis at December 31, 1997 and 1996, respectively. F-22 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued 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: KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued H.Fair Value Disclosures of Financial Instruments, continued Cash and Cash Equivalents and Short-term Investment 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. PIMs There is no active trading market for these investments. Management estimates the fair value of the PIMs using quoted market prices of MBS having the same stated coupon rate. Management does not include any participation income in the Partnership s estimated fair value arising from the properties, because 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 Trust's investments in PIMs had gross unrealized gains of approximately $822,000 at December 31, 1997 and gross unrealized gains and losses of approximately $3,282,000 and $343,000 respectively, at December 31, 1996. At December 31, 1997 and 1996, the estimated fair values of the Partnership's financial instruments are as follows: 1997 1996 Cash and cash equivalents and short-term investment $ 9,052 $ 7,921 MBS 44,728 41,284 PIMs 122,870 154,657 $176,650 $203,862 I. Subsequent Events On February 17, 1998, the Partnership received repayments of the Fallwood Apartments, Westbrook Manor Apartments and Greenbriar Apartments PIMs, respectively. The Partnership received the outstanding principal balances of $6,505,922, 4,841,446 and $2,196,031 on the Fourth Ward Square and Meredith Square Apartment PIMs, respectively. The Partnership received all unpaid Additional Interest owed on all three deals totaling $619,893 as well as Shared Appreciation Interest totaling $281,376. The Partnership will distribute the capital proceeds from these three transactions to investors through a special distribution in March of 1998. F-24 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued
KRUPP INSURED PLUS-II LIMITED PARTNERSHIP SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE December 31, 1997 Normal Monthly Carrying Interest Maturity Payment Original Current Amount at PIMs (a) Rate (b) Date (k) (1) Face Amount Face Amount 12/31/97(r) GNMA Country Meadows 8.25% 10/15/30 89,100 $12,475,000 $12,110,893 $12,110,893 Apts (c)(e)(h) Savage, MD Denrich Apartments 6.25% 12/15/23 24,900 3,500,000 3,271,315 3,271,315 Philadelphia, PA (c)(e) (h)(q) Fallwood Apts 8.00% 7/15/23 49,700 7,000,000 6,515,712 6,515,712 Indianapolis, IN (c)(e)(h) Greenbrier Apts 8.25% 9/15/23 17,100 2,350,000 2,197,833 2,197,833 Overland Park, KS (c)(e)(h) Harbor House Apts 8.25% 4/12/31 89,200 12,484,304 12,168,416 12,168,416 Madison, WI (g)(h)(m) Le Coeur du Monde 8.25% 10/15/30 70,100 9,814,200 9,523,294 9,523,294 Apts (c)(f) St. Louis, MO (n) Longwood Villas 8.00% 4/15/24 47,500 6,690,456 6,278,487 6,278,487 Apts (p) Orlando, FL Richmond Park 7.50% 8/15/24 107,900 16,000,000 14,962,634 14,962,634 Richmond Heights, (c)(e)(h) OH Saratoga Apts. 7.875% 8/15/24 47,300 6,750,000 6,343,907 6,343,907 Rolling Meadows, (c)(e)(h) IL The Greehouse 8.50% 2/15/30 64,600 8,810,900 8,538,584 8,538,584 Omaha, NE (d)(e)(h) Westbrook Manor 8.25% 5/15/23 37,900 5,200,000 4,845,547 4,845,547 Apts. (c)(e)(h) Omaha, NE 91,074,860 86,756,622 86,756,622 FNMA Carlyle Court 7.25% 10/1/99 54,600 8,280,000 7,783,081 7,783,081 Indianapolis, IN (c)(e)(h) (o) Hillside Court 7.25% 10/1/99 30,000 4,590,000 4,314,534 4,314,534 Centerville, OH (c)(e)(h) (o) Stanford Court 7.25% 10/1/99 46,700 7,110,000 6,683,247 6,683,247 Speedway, IN (c)(e)(h) (o)
Normal Monthly Carrying Interest Maturity Payment Original Current Amount at PIMs (a) Rate (b) Date (k) (1) Face Amount Face Amount 12/31/97(r) Waterford Court 7.75% 10/1/99 69,500 10,035,000 9,490,739 9,490,739 Lafayette, IN (c)(g)(j) (o) 30,015,000 28,271,601 28,271,601 HUD Walden Village 8.55% 11/1/30 53,200 7,220,800 7,019,830 7,019,830 Apts. (c)(f)(I) Dayton, OH $128,310,660 $122,048,053 $122,048,053
(a) The Participating Insured Mortgages ("PIMs") consist of either a mortgage-backed security guaranteed by the Federal National Mortgage Association ( FNMA ) or the Government National Mortgage Association ( GNMA ), or a direct mortgage insured by the United States Department of Housing and Urban Development ("HUD") and a subordinated promissory note and mortgage or shared income and appreciation agreement with the underlying Borrower that conveys participation interests in the revenue stream and appreciation of the underlying property above certain specified base levels. (b) Represents the permanent interest rate of the GNMA or FNMA MBS or the HUD direct mortgage less the servicing fee. In addition, the Partnership receives additional interest consisting of (I) Minimum Additional Interest based on a percentage of the unpaid principal balance of the first mortgage on the property, (ii) Shared Income Interest based on a percentage of monthly gross income generated by the underlying property in excess of a specified base amount (but only to the extent it exceeds the amount of Minimum Additional Interest received during such month), (iii) Shared Appreciation Interest based on a percentage of any increase in the value of the underlying property in excess of a specified base value. (c) Minimum additional interest is at a rate of .5% per annum calculated on the unpaid principal balance of the first mortgage note. (d) Minimum additional interest is at a rate of .75% per annum calculated on the unpaid principal balance of the first mortgage note. (e) Shared income interest is based on 25% of monthly gross rental income over a specified base amount. (f) Shared income interest is based on 30% of monthly gross rental income over a specified base amount. (g) Shared income interest is based on 35% of monthly gross rental income over a specified base amount. (h) Shared appreciation interest is based on 25% of any increase in the value of the project over the specified base value. (i) Shared appreciation interest is based on 30% of any increase in the value of the project over the specified base value. (j) Shared appreciation interest is based on 35% of any increase in the value of the project over the specified base value. (k) The Partnership's GNMA MBS and HUD direct mortgages have call provisions, which allow the Partnership to accelerate their respective maturity date. (l) The normal monthly payment consisting of principal and interest is payable monthly at level amounts over the term of the GNMA MBS and the HUD direct mortgages. The GNMA MBS, FNMA MBS and HUD-insured first mortgage loan generally may not be prepaid during the first five years and may be prepaid subject to a 9% prepayment penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty after year ten. The normal monthly payment consisting of principal and interest for FNMA MBS is payable at level amounts based on a 35-year amortization. All unpaid principal and accrued interest is due at the end of year ten. (m) The Partnership agreed to temporarily reduce the interest rate on the Harbor House PIM. The reduction, which was effective on March 1, 1992, lasted for a period of thirty months and ranged from 6.75% to 7.75% per annum and thereafter is 8.25% per annum. As consideration for this reduction, the Partnership increased its Minimum Additional Interest from .5% to .75% as well as reduced the Shared Appreciation Interest Base from $13,750,000 to $13,000,000. (n) The Partnership agreed to temporarily reduce the interest rate on the Le Couer du Monde PIM. The reduction was retroactive to October 1, 1992, and ranged from 6.375% to 8.125% per annum through October 1, 1995 and thereafter is at 8.25% per annum. As consideration for this reduction, the Partnership increased its Shared Appreciation Interest rate from 30% to 35% and decreased the base value used for this calculation from $10,795,620 to $9,814,200. (o) The approximate principal balance due at maturity for each PIM, respectively, is as follows: PIM Amount Carlyle Court $7,620,000 Hillside Court $4,224,000 Stanford Court $6,543,000 Waterford Court $9,308,000 (p) The Partnership permitted the borrower to sell the property and the buyer assumed the first mortgage loan and any future obligations arising under the participation features. The Partnership received $35,000 as a discounted payoff of the accumulated participation interest through the sale date. F-31 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE, Continued (q) On June 28, 1995, the Partnership entered into a temporary interest rate reduction agreement on the Denrich Apartments PIM. Beginning July 1, 1995, the interest rate decreased from 8% per annum to 6.25% per annum for thirty months, then increases to 6.75% per annum for the following thirty-six month period and then increases to the original interest rate of 8% per annum. The difference between interest at the original interest rate and the reduced interest 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 level for calculating Shared Appreciation Interest decreased from $4,025,000 to $3,500,000. (r) The aggregate cost of PIMs for federal income tax purposes is $122,048,053. A reconciliation of the carrying value of PIMs for each of the three years in the period ended December 31, 1997 is as follows:
1997 1996 1995 Balance at beginning of period $151,717,926 $152,929,361 $154,042,671 Deductions during period: Reclassification (11,850,469) - - Prepayments and principal collections (17,819,404) (1,211,435) (1,113,310) Balance at end of period $122,048,053 $151,717,926 $152,929,361
F-32 EX-27 2
5 The schedule contains summary financial information extracted from the balance sheet and statement of income and is qualified in its entirety by reference to such financial statements. 0000805297 KRUPP INSURED PLUS II LTD PARTNERSHIP 12-MOS DEC-31-1997 DEC-31-1997 9,052,480 166,775,746 1,180,660 0 0 3,118,091 0 0 180,126,977 25,588 0 0 0 178,332,169 1,769,220 180,126,977 0 16,672,558 0 0 3,699,958 0 0 12,972,600 0 12,972,600 0 0 0 12,972,600 0 0 Includes Participating Insured Mortgages ("PIMs") of $122,048,053 and Mortgage-Backed Securities ("MBS") of $44,727,693. Includes prepaid acquisition fees and expenses of $10,774,240 net of accumulated amortization of $8,293,080 and prepaid participation servicing fees of $3,344,245 net of accumulated amortization of $2,707,314. Represents total equity of General Partners and Limited Partners. General Partners deficit of ($265,315) and Limited Partners equity of $178,597,484. Unrealized gain on MBS. Represents interest income on investments in mortgages and cash. Includes $1,907,062 of amortization of prepaid fees and expenses. Net income allocated $389,178 to the General Partners and $12,583,422 to the Limited Partners. Average net income per Limited Partner interest is $.86 on 14,655,512 Limited Partner interest outstanding.
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