-----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, ULowkT8zzJQQfKMnGhb+8NqBPRwpCAW/rPQv6r/TwBWL8heaAG/C3GrcbqnJ/CzP Yx0omcls9Isv+M68NVc1KQ== 0001047469-03-000463.txt : 20030107 0001047469-03-000463.hdr.sgml : 20030107 20030107124541 ACCESSION NUMBER: 0001047469-03-000463 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20030107 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16817 FILM NUMBER: 03506191 BUSINESS ADDRESS: STREET 1: ONE BEACON ST CITY: BOSTON STATE: MA ZIP: 02108 BUSINESS PHONE: 6175230066 MAIL ADDRESS: STREET 1: ONE BEACON ST CITY: BOSTON STATE: MA ZIP: 02108 10-K/A 1 a2095236z10-ka.txt 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________to____________ Commission file number 0-16817 Krupp Insured Plus-II Limited Partnership - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2955007 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One Beacon Street, Boston, Massachusetts 02108 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (617) 523-0066 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. / /. Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes / / No /X/ Aggregate market value of voting securities held by non-affiliates: Not applicable, as securities are non-voting. Documents incorporated by reference: See Item 15 The exhibit index is located on pages 11-12. 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 remaining PIM investment is a multi-family residential property consisting of a MBS guaranteed as to principal and basic interest. This MBS was issued or originated under or in connection with the housing program of the Government National Mortgage Association ("GNMA"). This PIM provides the Partnership with monthly payments of principal and basic interest and may 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 feature is neither insured nor guaranteed. The Partnership also has investments in MBS and insured mortgages collateralized by single-family or multi-family mortgage loans issued or originated by GNMA, Fannie Mae, the Department of Housing and Urban Development ("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 Partnership anticipates that there will be sufficient cash flow from the mortgages to meet cash requirements. To the extent that the Partnership's cash flow should be insufficient to meet the Partnership's operating expenses and liabilities, it will be necessary for the Partnership to obtain additional funds by liquidating its investment in one or more mortgages or by borrowing. The Partnership may borrow money on an unsecured or secured basis to further the purposes of the Partnership. The Partnership may pledge mortgages as security for any permitted borrowing. The Partnership, under some circumstances, may borrow funds from any general partner or an affiliate of any general partner. However, the transaction must include interest rates and other finance charges and fees not in excess of the amounts that are charged by unaffiliated lenders for comparable loans and must satisfy other conditions specified in the partnership agreement. The Partnership has not borrowed any funds during the past and does not intend to do so in the future. The Partnership expects that it will sell its remaining assets in the near future, because its final PIM investment will be repaid soon. Once that happens, the Partnership will proceed with an orderly liquidation of the fund. The Partnership will not underwrite securities of other issuers, offer securities in exchange for property, invest in securities of other issuers for the purpose of exercising control or issue senior securities and has not engaged in any of these activities during the past. The Partnership has not repurchased or reacquired any of the partner interests from partners or units from unit holders in the past and does not intend to do so in the future. The Partnership may not make loans to any general partner or any affiliate of any general partner and will not make loans to any other person other than mortgage investments of the type described above. The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the -2- Partnership's operations, and no adverse effect is anticipated in the future. As of December 31, 2001, there were no personnel directly employed by the Partnership. ITEM 2. PROPERTIES None ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or to which any of its investments is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There currently is no established trading market for the Units. The number of investors holding Units as of December 31, 2001 was approximately 12,500. 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 July 18, 2001, the Partnership paid a special distribution of $.31 per Limited Partner interest from the Orchard Landing MBS principal proceeds received during May 2001 in the amount of $4,440,315. 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. The Partnership will make special distributions in the future when its PIM prepays and when it liquidates any remaining assets. The Partnership made the following distributions to its Partners during the two years ended December 31, 2001 and 2000:
2001 2000 ---------------------------- ---------------------------- Amount Per Unit Amount Per Unit ------------- -------- ------------- -------- Quarterly Distributions: Limited Partners $ 5,862,204 $ .40 $ 5,862,204 $ .40 General Partners 69,366 - 97,176 - ------------- ------------- 5,931,570 5,959,380 ------------- ------------- Special Distributions: Limited Partners 4,543,209 $ .31 14,802,066 $ 1.01 ------------- ------------- Total Distributions $ 10,474,779 $ 20,761,446 ============= =============
ITEM 6. SELECTED FINANCIAL DATA -3- 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.
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total revenues $ 2,790,634 $ 3,520,446 $ 7,822,665 $ 15,335,618 $ 16,672,558 Net income 2,171,571 2,770,378 6,146,718 12,017,670 12,972,600 Net income allocated to: Limited Partners ("LP") 2,106,424 2,687,267 5,962,316 11,657,140 12,583,422 Average per LP interest .14 .18 .41 .80 .86 General Partners 65,147 83,111 184,402 360,530 389,178 Total assets at: December 31 34,466,969 42,256,448 60,161,993 117,626,762 180,126,977 Distributions to: Quarterly to LPs 5,862,204 5,862,204 11,138,189 16,414,173 16,414,173 Average per LP interest .40 .40 .76 1.12 1.12 Specials to LPs 4,543,209 14,802,066 51,587,401 56,716,830 24,767,815 Average per LP interest .31 1.01 3.52 3.87 1.69 General Partners 69,366 97,176 217,645 385,355 436,626
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Partnership's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, federal, state or local regulations; adverse changes in general economic or local conditions; pre-payments of mortgages; failure of borrowers to pay participation interests due to poor operating results at properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Partnership and its Affiliates, including the General Partners. LIQUIDITY AND CAPITAL RESOURCES The most significant demands on the Partnership's liquidity are the quarterly distributions paid to investors. 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. Based on current projections, the General Partners have determined that the Partnership will adjust the current distribution rate beginning with the distribution payable in February 2002 to $.05 per Limited Partner interest per quarter. This will result in a payment of approximately $733,000 each quarter. In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investment also may provide participation interest if the underlying property operates 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 -4- appreciation in value when the property is 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. During May 2001, the Partnership received a payoff of the Orchard Landing MBS in the amount of $4,440,315. On July 18, 2001 the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds. Also during May 2001, the Partnership received $30,769 from the borrowers of the Richmond Park PIM as a settlement to release the loan's participation features. The property was not generating sufficient cash flow to pay any participation from property operations nor did it have sufficient appreciation in value to meet the threshold to pay any participation based on value if the property was sold or refinanced. Considering the property's physical condition, there was little likelihood that its status would improve. Rental rate increase and occupancy levels had been difficult to achieve. Consequently, all of the cash flow generated by the property went back into operations. While the borrower had assured that the insured first mortgage debt was serviced, no major capital improvements were undertaken to enhance the property's leasing efforts. Furthermore, routine maintenance and repairs were beginning to be prioritized according to need and available cash. The condition of the property and its inability to generate sufficient cash flow seriously impaired the ability of the borrower to either sell the property or refinance it without taking a loss. Their business plan was to make a significant investment in the property to correct deferred maintenance and functional obsolescence and to market it for leasing in order to reposition the property for a successful sale or refinance. They were unwilling to make the significant investments necessary while the property was encumbered with the PIM's participation features. As a result, the borrowers requested a release of the participation features while keeping the insured first mortgage in place until the property turns around. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property's physical condition. Upon this settlement, the insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS as the only remaining portion of the investment is a GNMA MBS. The Partnership also reclassified this investment to available for sale concurrent with the release of the participation feature. The Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold. 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. The Partnership's only remaining PIM investment is the GNMA security backed by the first mortgage loan on Denrich -5- Apartments. Presently, the borrower is working on refinancing the underlying first mortgage as there are no contractual obligations remaining that would prevent a prepayment of the underlying first mortgage. The property is thirty years old, and 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 led 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 do not expect the Partnership to receive participation interest from Denrich Apartments. The property is currently negotiating a refinancing agreement and the General Partners expect that the borrower will close his refinancing transaction during 2002. If the borrower is successful, it would result in a payoff of the Denrich PIM to the Partnership followed by a liquidation of the remaining assets and a final special distribution to the Partners. CRITICAL ACCOUNTING POLICY The Partnership's critical accounting policy relates primarily to revenue recognition related to the participation feature of the Partnership's PIM investment. The Partnership's policy is as follows: Basic interest on the PIM is recognized based on the stated coupon rate of the GNMA MBS. The Partnership's recognizes interest related to the participation feature when the amount becomes fixed and the transaction that gives rise to such amount is finalized, cash is received and all contingencies are resolved. This could be the sale or refinancing of the underlying real estate, which results in a cash payment to the Partnership or a cash payment made to the Partnership from surplus cash relative to the participation feature. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASSESSMENT OF CREDIT RISK The Partnership's investments in its MBS portion of its PIM and its MBS are guaranteed and/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. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in the United States with significant experience in mortgage securitizations. In addition, their MBS instruments carry the highest credit rating given to financial instruments. 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, 2001 the Partnership includes in cash and cash equivalents approximately $699,000 of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization. INTEREST RATE RISK The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 2001, the Partnership's PIM and MBS comprise the majority of the Partnership's assets. Decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold its PIM investment to expected maturity, while it is expected that substantially all of the MBS will prepay over the same time period, thereby mitigating any potential interest rate risk to the disposition value of any remaining MBS. The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the -6- Partnership, when setting regular distribution policy. For MBS, the Partnership forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For its remaining PIM, the Partnership continues to monitor the borrower's intention to refinance the underlying first mortgage. The table on the following page provides information about the Partnership's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates ("WAIR") by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments.
Expected maturity dates ($ in thousands) ---------------------------------------------------------------------------------------------- Total Face Fair 2002 2003 2004 2005 2006 Thereafter Value Value(1) ---------------------------------------------------------------------------------------------- Interest-sensitive assets: MBS $ 1,059 $ 984 $ 929 $ 891 $ 868 $ 24,876 $ 29,607 $ 30,575 WAIR 7.56% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56% PIM 3,101 - - - - - 3,101 3,247 WAIR 8.00% 0.00% 0.00% 0.00% 0.00% 0.00% 8.00% -------- -------- -------- -------- -------- ---------- -------- -------- Total Interest-sensitive assets $ 4,160 $ 984 $ 929 $ 891 $ 868 $ 24,876 $ 32,708 $ 33,822 ======== ======== ======== ======== ======== ========== ======== ========
(1) The methodology used by the Partnership to estimate the fair value of each class of financial instruments is described in Note H to the Partnership's financial statements presented in Appendix A to this report. As described in that note, the Partnership does not include an estimate of value for the participation interest associated with its PIM investment. RESULTS OF OPERATIONS The following discussion relates to the operation of the Partnership during the years ended December 31, 2001, 2000 and 1999.
(Amounts in thousands) 2001 2000 1999 --------- --------- --------- Interest income on PIMs: Basic interest $ 613 $ 1,360 $ 3,682 Participation interest 31 - 1,635 Interest income on MBS 2,022 1,685 1,826 Other interest income 125 475 680 Partnership expenses (553) (628) (778) Amortization of prepaid fees and expenses (66) (122) (898) --------- --------- --------- Net Income $ 2,172 $ 2,770 $ 6,147 ========= ========= =========
Net income decreased during 2001 as compared to 2000 primarily due to lower basic interest on PIMs and other interest income. This decrease was partially offset by an increase in interest income on MBS. The reduction in basic interest on PIMs is primarily due to the reclassification of the Richmond Park PIM to an MBS in May 2001. Interest income on MBS increased due to the reclassification, but was partially offset by the payoff of the Orchard Landing -7- MBS in May 2001. Other interest income decreased due to significantly lower average interest rates earned on cash balances available for short-term investing in 2001 versus 2000. 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. As the Partnership distributes principal collections on MBS and PIMs through quarterly or special distributions, the invested assets of the Partnership will decline which should result in a continuing decline in net income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Appendix A to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Information as to the directors and executive officers of Krupp Plus Corporation which is a General Partner of the Partnership and is the general partner of Mortgage Services Partners Limited Partnership, which is the other General Partner of the Partnership, is as follows:
Position with Name and Age Krupp Plus Corporation ------------ ---------------------- Douglas Krupp (55) President, Co-Chairman of the Board and Director George Krupp (57) Co-Chairman of the Board and Director Peter F. Donovan (48) Senior Vice President Ronald Halpern (60) Senior Vice President Robert A. Barrows (44) Vice President and Treasurer Carol J.C. Mills (52) Vice President
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 two 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 two 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, -8- 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 10th largest commercial mortgage servicer in the United States with a servicing and asset management portfolio of $14.1 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 and treasury functions 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 $14.1 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, the Mortgage Bankers Association and the Servicing Advisory Council for Freddie Mac. 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, 2001, 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 the 2.5% general partner interest held by Krupp Plus Corporation, the 97.5% general partner interest held by Mortgage Services Partners Limited Partnership and the 100 limited partner interests (0.0007% of the total outstanding) held by Krupp Depositary Corporation, an affiliate of the General Partners. 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 -9- 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. Upon the occurrence of a terminating capital transaction, as defined in the Partnership Agreement, the net cash proceeds and winding up of the affairs of the Partnership will be allocated among the Partners first, to each class of Partners in the amount equal to, or if less than, in proportion to, the positive balance in the Partner's capital accounts, second, to the Limited Partners until they have received a return of their total invested capital, third, to the General Partners until they have received a return of their total invested capital, fourth, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners have received 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, fifth, to the General Partners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and sixth, 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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. During 2001, Mortgage Services Partners Limited Partnership, a General Partner, received $261,650 related to the Asset Management Fee. 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. During 2001, the Berkshire Companies Limited Partnership and Berkshire Mortgage Finance Limited Partnership, affiliates of the General Partners, received a total of $119,166 in reimbursements. During 2001, the General Partners received distributions totaling $69,366 related to their 3% share of Distributable Cash Flow. ITEM 14. CONTROLS AND PROCEDURES. Not applicable. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements - see Index to Financial Statements and Schedule included under Item 8, Appendix A, page F-2 of this report. 2. Financial Statement Schedule - see Index to Financial Statements and Schedule included under Item 8, Appendix A, page F-2 of 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) REPORTS ON FORM 8-K During the last quarter of the year ended December 31, 2001, the Partnership did not file any reports on Form 8-K. (c) Exhibits: -10- NUMBER AND DESCRIPTION UNDER REGULATION S-K The following page 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)].* (99) Other: -11- (99.1) Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+ (99.2) Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+ * Incorporated by reference. + Filed herein -12- 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 7th day of January, 2003. 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 7th day of January, 2003. SIGNATURES TITLE(S) /s/ Douglas Krupp President, Co-Chairman (Principal Executive - -------------------------- Officer) and Director of Krupp Plus Douglas Krupp Corporation, 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 -13- CERTIFICATIONS I, Douglas Krupp, certify that: 1. I have reviewed this annual report on Form 10-K/A of Krupp Insured Plus - II Limited Partnership; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: January 7, 2003 /s/ Douglas Krupp --------------------------- Douglas Krupp Principal Executive Officer -14- CERTIFICATIONS I, Robert A. Barrows, certify that: 1. I have reviewed this annual report on Form 10-K/A of Krupp Insured Plus - II Limited Partnership; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: January 7, 2003 /s/ Robert A. Barrows ------------------------ Robert A. Barrows Chief Accounting Officer -15- 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, 2001 F-1 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULES ---------- Report of Independent Accountants F-3 Balance Sheets at December 31, 2001 and 2000 F-4 Statements of Income and Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999 F-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 2001, 2000 and 1999 F-6 Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 F-7 Notes to Financial Statements F-8 - F-16
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. F-2 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, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 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 22, 2002 F-3 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP BALANCE SHEETS December 31, 2001 and 2000 ----------
2001 2000 ------------- ------------- ASSETS Participating Insured Mortgages ("PIMs") (Notes B, C and H) $ 3,101,005 $ 17,541,596 Mortgage-Backed Securities and insured mortgage ("MBS") (Notes B, D and H) 30,211,162 21,247,646 ------------- ------------- Total mortgage investments 33,312,167 38,789,242 Cash and cash equivalents (Notes B, C and H) 933,678 3,125,710 Interest receivable and other assets 221,124 275,591 Prepaid acquisition fees and expenses, net of accumulated amortization of $0 and $733,572, respectively (Note B) - 65,905 ------------- ------------- Total assets $ 34,466,969 $ 42,256,448 ============= ============= LIABILITIES AND PARTNERS' EQUITY Liabilities $ 17,875 $ 17,889 ------------- ------------- Partners' equity (deficit) (Notes A, C and E): Limited Partners (14,655,512 Limited Partner interest outstanding) 34,084,355 42,383,344 General Partners (341,667) (337,448) Accumulated comprehensive income (Note B) 706,406 192,663 ------------- ------------- Total Partners' equity 34,449,094 42,238,559 ------------- ------------- Total liabilities and Partners' equity $ 34,466,969 $ 42,256,448 ============= =============
The accompanying notes are an integral part of the financial statements. F-4 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2001, 2000 and 1999 ----------
2001 2000 1999 --------------- ---------------- -------------- Revenues: Interest income - PIMs: Basic interest $ 613,152 $ 1,360,247 $ 3,681,868 Participation interest 30,769 - 1,634,686 Interest income - MBS 2,021,867 1,685,246 1,826,026 Other interest income 124,846 474,953 680,085 --------------- ---------------- -------------- Total revenues 2,790,634 3,520,446 7,822,665 --------------- ---------------- -------------- Expenses: Asset management fee to an affiliate (Note F) 261,650 299,983 496,464 Expense reimbursement to affiliates (Note F) 119,166 125,209 94,160 Amortization of prepaid fees and expenses (Note B) 65,905 122,275 898,457 General and administrative 172,342 202,601 186,866 --------------- ---------------- -------------- Total expenses 619,063 750,068 1,675,947 --------------- ---------------- -------------- Net income (Notes E and G) 2,171,571 2,770,378 6,146,718 Other Comprehensive Income: Net change in unrealized gain on MBS 513,743 87,582 (435,431) --------------- ---------------- -------------- Total Comprehensive Income $ 2,685,314 $ 2,857,960 $ 5,711,287 =============== ================ ============== Allocation of net income (Notes E and G.): Limited Partners $ 2,106,424 $ 2,687,267 $ 5,962,316 =============== ================ ============== Average net income per Limited Partner Interest (14,655,512 Limited Partner interests outstanding) $ .14 $ .18 $ .41 =============== ================ ============== General Partners $ 65,147 $ 83,111 $ 184,402 =============== ================ ==============
The accompanying notes are an integral part of the financial statements. F-5 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999 ----------
Accumulated Total Limited General Comprehensive Partners' Partners Partners Income Equity ------------- ------------ ------------- ------------- Balance at December 31, 1998 $ 117,123,621 $ (290,140) $ 540,512 $ 117,373,993 Net income 5,962,316 184,402 - 6,146,718 Quarterly distributions (11,138,189) (217,645) - (11,355,834) Special distributions (51,587,401) - - (51,587,401) Change in unrealized gain on MBS - - (435,431) (435,431) ------------- ------------ ------------- ------------- Balance at December 31, 1999 60,360,347 (323,383) 105,081 60,142,045 Net income 2,687,267 83,111 - 2,770,378 Quarterly distributions (5,862,204) (97,176) - (5,959,380) Special distributions (14,802,066) - - (14,802,066) Change in unrealized gain on MBS - - 87,582 87,582 ------------- ------------ ------------- ------------- Balance at December 31, 2000 42,383,344 (337,448) 192,663 42,238,559 Net income 2,106,424 65,147 - 2,171,571 Quarterly distributions (5,862,204) (69,366) - (5,931,570) Special distributions (4,543,209) - - (4,543,209) Change in unrealized gain on MBS - - 513,743 513,743 ------------- ------------ ------------- ------------- Balance at December 31, 2001 $ 34,084,355 $ (341,667) $ 706,406 $ 34,449,094 ============= ============ ============= =============
The accompanying notes are an integral part of the financial statements. F-6 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999 ----------
2001 2000 1999 ------------- -------------- ------------- Operating activities: Net income $ 2,171,571 $ 2,770,378 $ 6,146,718 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid fees and expenses 65,905 122,275 898,457 Premium Amortization 22,153 - - Shared Appreciation Interest and prepayment premiums - - (1,162,777) Changes in assets and liabilities: Decrease in interest receivable and other assets 54,467 102,695 352,543 Decrease in liabilities (14) (2,059) (232,821) ------------- -------------- ------------- Net cash provided by operating activities 2,314,082 2,993,289 6,002,120 ------------- -------------- ------------- Investing activities: Principal collections on PIMs including Shared Appreciation Interest and prepayment premium of $1,162,777 in 1999 119,842 8,682,792 57,196,596 Principal collections on MBS 5,848,823 1,117,892 2,078,965 ------------- -------------- ------------- Net cash provided by investing activities 5,968,665 9,800,684 59,275,561 ------------- -------------- -------------- Financing activities: Quarterly distributions (5,931,570) (5,959,380) (11,355,834) Special distributions (4,543,209) (14,802,066) (51,587,401) ------------- -------------- ------------- Net cash used for financing activities (10,474,779) (20,761,446) (62,943,235) ------------- -------------- ------------- Net (decrease) increase in cash and equivalents (2,192,032) (7,967,473) 2,334,446 Cash and cash equivalents, beginning of year 3,125,710 11,093,183 8,758,737 ------------- -------------- ------------- Cash and cash equivalents, end of year $ 933,678 $ 3,125,710 $ 11,093,183 ============= ============== ============= Supplemental disclosure of non-cash investing activities: Reclassification of investment in a PIM to MBS $ 14,320,749 $ - $ - ============= ============== ============= Non cash activities: Increase (decrease) in fair value of MBS $ 513,743 $ 87,582 $ (435,431) ============= ============== =============
The accompanying notes are an integral part of the financial statements. F-7 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 Depositary 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 accounting principles generally accepted in the United States of America ("GAAP"). 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. The Partnership classifies its MBS portfolio as available-for-sale as the Partnership expects that a portion of the MBS portfolio will remain after all of the PIMs pay off and that it will be necessary to then sell the remaining MBS portfolio at that time in order to close out the Partnership. In addition, other situations such as liquidity needs could arise which would necessitate the sale of a portion of the MBS portfolio. 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 Partnership also holds a Federal Housing Administration ("FHA") insured mortgage which is classified as MBS. The Partnership holds this loan at amortized cost and does not establish loan loss reserves on this investment as it is fully insured by the FHA. PIMs The Partnership accounts for its MBS portion of a PIM investment in accordance with FAS 115, under the classification of held to maturity as this investment has a participation feature. As a result, the Partnership would not sell or otherwise dispose of the MBS. Accordingly, the Partnership has both the intention and ability to hold this investment to expected maturity. The Partnership carries this MBS at amortized cost. Basic interest on the PIM is recognized based on the stated coupon rate of the Government National Mortgage Association ("GNMA") MBS. The Partnership's recognizes interest related to the participation feature when the amount becomes fixed and the transaction that gives rise to such amount is finalized, cash is received and all contingencies resolved. 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 F-8 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- B. SIGNIFICANT ACCOUNTING POLICIES, continued PREPAID FEES AND EXPENSES Prepaid fees and expenses consisted of acquisition fees and expenses paid for the acquisition of PIMs. The Partnership amortized prepaid acquisition fees and expenses using a method that approximated the effective interest method over a period of ten to twelve years, which represented the estimated life of the underlying mortgage. Upon the repayment of a PIM, any unamortized acquisition fees and expenses related to such loan were 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 GAAP 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, 2001 and 2000, the Partnership had investments in one PIM and two PIMs, respectively. The Partnership's remaining PIM consists 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 Partnership may receive income related to its participation interests in the underlying property, however, these amounts are neither insured nor guaranteed. The participation features consist of the following: (i) "Minimum Additional Interest" equal to .5% 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 Income Interest from the operations of the property is limited to 50% of net revenue or Surplus Cash as defined by HUD. Continued F-9 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- C. PIMs, continued The total amount of Minimum Additional Interest, Shared Income Interest and Shared Appreciation Interest payable on the maturity date by the underlying borrower usually cannot exceed 50% of any increase in value of the property. Shared Appreciation Interest is payable when one of the following occurs: (1) the sale of the underlying property to an unrelated third party on a date which is later than five years from the date of the Agreement, (2) the maturity date or accelerated maturity date of the Agreement, or (3) prepayment of amounts due under the Agreement and the insured mortgage. Under the Agreement, the Partnership, upon giving twelve months written notice, can accelerate the maturity date of the Agreement and insured mortgage to a date not earlier than ten years from the date of the Agreement for (a) the payment of all participation interest due under the Agreement as of the accelerated maturity date, or (b) the payment of all participation interest due under the Agreement plus all amounts due on the first mortgage note on the property. During May 2001, the Partnership received $30,769 from the borrowers of the Richmond Park PIM as a settlement to release the loan's participation features. The property was not generating sufficient cash flow to pay any participation from property operations nor did it have sufficient value to meet the threshold to pay any participation based on value if the property was sold or refinanced. The borrowers asked for a release of the participation features while keeping the insured first mortgage in place until the property turns around. The General Partners agreed to this request in return for the settlement because there was no expectation that the Partnership would be entitled to any participation proceeds now or in the future in the property's current condition. Upon this settlement, the insured first mortgage loan on Richmond Park was reclassified from a PIM to a MBS as the only remaining portion of the investment is a GNMA MBS. The Partnership also reclassified this investment to available for sale concurrent with the release of the participation feature. The Partnership will continue to receive the scheduled principal and interest payments on the first mortgage until the property is refinanced or sold. 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. Continued F-10 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- C. PIMs, continued 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. At December 31, 2001 and 2000 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, 2001 and 2000:
Investment Basis at December 31, Original Interest Maturity Monthly -------------------------------- GNMA Face Amount Rates(a) Dates(e) Payment(f) 2001 2000 - -------------------- -------------- ---------- --------- ---------- ------------- ------------- Denrich Apartments Philadelphia, PA $ 3,500,000 8% 12/15/23 $ 24,800 $ 3,101,005 $ 3,148,969 (b)(c) (d)(g) Richmond Park(h) Richmond Heights, OH 16,000,000 - - - - 14,392,627 -------------- ------------- ------------- $ 19,500,000 $ 3,101,005(j) $ 17,541,596 ============== ============= =============
(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. (c) Shared Income Interest is based on 25% of monthly gross rental income over a specified base amount. (d) Shared Appreciation Interest is based on 25% of any increase in the value of the project over the specified base value. (e) The Partnership's GNMA MBS has a call provision, which allows the Partnership to accelerate the maturity date. F-11 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- C. PIMs, continued (f) The normal monthly payment consisting of principal and basic interest is payable monthly at level amounts over the term of the GNMA MBS. (g) 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 increased to the original rate of 8% per annum. The difference between basic interest at the original interest rate and the reduced rates accumulated and will 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. (h) During May 2001, the Partnership received $30,769 as a settlement to release the loan's participation features. The insured first mortgage loan was reclassified from a PIM to a MBS. (i) The aggregate cost of the PIM for federal income tax purposes is $3,101,005. A reconciliation of the carrying value of PIMs for each of the three years in the period ended December 31, 2001 is as follows:
2001 2000 1999 -------------- -------------- -------------- Balance at beginning of period $ 17,541,596 $ 26,224,388 $ 82,258,207 Deductions during period: Prepayments and principal collections (119,842) (8,682,792) (56,033,819) Reclass to MBS (14,320,749) - - -------------- -------------- -------------- Balance at end of period $ 3,101,005 $ 17,541,596 $ 26,224,388 ============== ============== ==============
The underlying mortgage of the Denrich Apartments PIM is collateralized by a multi-family apartment complex located in Philadelphia, Pennsylvania. The apartment complex has 89 units. F-12 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- D. MBS During May 2001, the Partnership received a payoff of the Orchard Landing MBS in the amount of $4,440,315. On July 18, 2001 the Partnership paid a special distribution of $.31 per Limited Partner interest from the principal proceeds. At December 31, 2001, the Partnership's MBS portfolio had an amortized cost of $17,982,354 and unrealized gains of $706,406. At December 31, 2001, the Partnership's insured mortgage had an amortized cost of $11,522,402 and an unrealized gain of $363,763. 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. The portfolio has maturities ranging from 2007 to 2028.
Unrealized Maturity Date Fair Value Gain --------------- -------------- ------------- 2002 - 2006 $ - $ - 2007 - 2011 1,643,717 159,611 2012 - 2028 28,931,208 910,558 -------------- ------------- Total $ 30,574,925 $ 1,070,169 ============== =============
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. Upon the occurrence of a terminating capital transaction, as defined in the Partnership Agreement, the net cash proceeds and winding up of the affairs of the Partnership will be allocated among the Partners first, to each class of Partners in the amount equal to, or if less than, in proportion to, the positive balance in the Partner's capital accounts, second, to the Limited Partners until they have received a return of their total invested capital, third, to the General Partners until they have received a return of their total invested capital, fourth, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners have received 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, fifth, to the General Partners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and sixth, 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 2001, 2000 and 1999 the Partnership made quarterly distributions totaling $.40, $.40 and $.76 per Limited Partner interest, respectively. The Partnership made special distributions of $.31, $1.01 and $3.52 per Limited Partner interest in 2001, 2000 and 1999, respectively. F-13 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- E. PARTNERS' EQUITY, continued As of December 31, 2001, the following cumulative partner contributions and allocations have been made since the inception of the Partnership:
Corporate Accumulated Limited General Comprehensive Unitholders Partner Partners Income Total -------------- ------------ ------------ ------------- -------------- Capital contributions $ 292,176,381 $ 2,000 $ 3,000 $ - $ 292,181,381 Syndication costs (15,580,734) - - - (15,580,734) Quarterly distributions (249,750,539) (1,740) (5,898,928) - (255,651,207) Special distributions (172,347,642) (1,176) - - (172,348,818) Net income 179,586,552 1,253 5,554,261 - 185,142,066 Unrealized gains on MBS - - - 706,406 706,406 -------------- ------------ ------------ ------------- -------------- Total at December 31, 2001 $ 34,084,018 $ 337 $ (341,667) $ 706,406 $ 34,449,094 ============== ============ ============ ============= ==============
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 F-14 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- G. FEDERAL INCOME TAXES The reconciliation of the income reported in the accompanying financial statements with the income reported in the Partnership's 2001 federal income tax return is as follows: Net income per statement of income $ 2,171,571 Less: Book to tax difference for amortization of prepaid fees and expenses (232,139) -------------- Net income for federal income tax purposes $ 1,939,432 ==============
The allocation of the 2001 net income for federal income tax purposes is as follows:
Portfolio Income -------------- Unitholders $ 1,881,236 Corporate Limited Partner 13 General Partners 58,183 -------------- $ 1,939,432 ==============
For the years ended December 31, 2001, 2000 and 1999 the average per unit net income to the Unitholders for federal income tax purposes was $.13, $.15 and $.33 respectively. The basis of the Partnership's assets for financial reporting purposes was less than its tax basis by approximately $183,000 and $929,000 at December 31, 2001 and 2000, respectively. The basis of the Partnership's liabilities for financial reporting purposes were the same as its tax basis at December 31, 2001 and 2000, 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 of approximately $1,070,000 at December 31, 2001 and gross unrealized gains and losses of $437,000 and $40,000, respectively, at December 31, 2000. Continued F-15 KRUPP INSURED PLUS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued ---------- 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 $146,000 at December 31, 2001 and gross unrealized gains of approximately $46,000 at December 31, 2000. At December 31, 2001 and 2000, the estimated fair values of the Partnership's financial instruments are as follows (amounts rounded to nearest thousand):
2001 2000 ------------------------ ----------------------- Fair Carrying Fair Carrying Value Value Value Value --------- --------- --------- --------- Cash and cash equivalents $ 934 $ 934 $ 3,126 $ 3,126 MBS and insured mortgages 30,575 30,211 21,451 21,248 PIMs 3,247 3,101 17,588 17,542 --------- --------- --------- --------- $ 34,756 $ 34,246 $ 42,165 $ 41,916 ========= ========= ========= =========
F-16 EX-99.1 3 a2095236zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Krupp Insured Plus II Limited Partnership (the "Partnership") on Form 10-K/A for the period ending December 31, 2001 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas Krupp, Co-Chariman (Principal Executive Officer), President and Director of Krupp Plus Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of December 31, 2001 (the last date of the period covered by the Report). /s/ Douglas Krupp - --------------------------- Douglas Krupp, Principal Executive Officer EX-99.2 4 a2095236zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Krupp Insured Plus II Limited Partnership (the "Partnership") on Form 10-K/A for the period ending December 31, 2001 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert A. Barrows, Chief Accounting Officer of Krupp Plus Corporation, a General Partner of the Partnership, certify, pursuant to U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of December 31, 2001 (the last date of the period covered by the Report). /s/ Robert A. Barrows - ------------------------ Robert A. Barrows, Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----