-----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, LuBiG1SvC3iXsG/RGkkeT7WlocThSW6Iw/AJv5j7LHwA30FDBJqbGuia3XXkhIpd atQlUrImZJTmcNDhjWNxWw== 0001169232-03-005202.txt : 20030814 0001169232-03-005202.hdr.sgml : 20030814 20030814112747 ACCESSION NUMBER: 0001169232-03-005202 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP GOVERNMENT INCOME TRUST CENTRAL INDEX KEY: 0000857264 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043089272 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19244 FILM NUMBER: 03844394 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232233 MAIL ADDRESS: STREET 1: 470 STREET 2: ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 FORMER COMPANY: FORMER CONFORMED NAME: GOVERNMENT INCOME TRUST DATE OF NAME CHANGE: 19900209 10-Q 1 d56594_10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 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 0-19244 Krupp Government Income Trust (Exact name of registrant as specified in its charter) Massachusetts 04-3089272 (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) (617) 523-0066 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |_| No |X| -1- Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, the words "believes," "anticipates," "expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the negative of such words) and similar expressions are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties, including but not limited to the following: federal, state or local regulations; adverse changes in general economic or local conditions; prepayments of mortgages; failure of borrowers to pay participation interests due to poor operating results of properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Trust and its Affiliates, including the Trustees. The Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2002, contain additional information concerning such risk factors. Actual results in the future could differ materially from those described in any forward-looking statements as a result of the risk factors set forth above, and the risk factors described in the Annual Report. -2- KRUPP GOVERNMENT INCOME TRUST BALANCE SHEETS ASSETS
June 30, December 31, 2003 2002 ----------- ------------ Participating Insured Mortgage Investments ("PIMIs") (Note 2) Insured Mortgages $ 9,115,391 $32,255,154 Additional Loans, net of impairment provision of $1,032,272 367,728 4,537,719 Participating Insured Mortgages ("PIMs")(Note 2) -- 16,949,637 Mortgage-Backed Securities and insured mortgage loan ("MBS") (Note 3) 5,526,653 6,313,121 ----------- ----------- Total mortgage investments 15,009,772 60,055,631 Cash and cash equivalents (Note 2) 19,955,254 1,986,243 Interest receivable and other assets 105,961 370,542 Prepaid acquisition fees and expenses, net of accumulated amortization of $773,166 and $738,546, respectively 11,540 46,160 Prepaid participation servicing fees, net of accumulated amortization of $257,203 and $683,812, respectively 4,359 62,497 ----------- ----------- Total assets $35,086,886 $62,521,073 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans $ 367,383 $ 1,351,768 Other liabilities 34,451 48,938 ----------- ----------- Total liabilities 401,834 1,400,706 ----------- ----------- Shareholders' equity (Note 4) Common stock, no par value; 17,510,000 Shares authorized; 15,053,135 Shares issued and outstanding 34,459,920 60,668,605 Accumulated comprehensive income 225,132 451,762 ----------- ----------- Total Shareholders' equity 34,685,052 61,120,367 ----------- ----------- Total liabilities and Shareholders' equity $35,086,886 $62,521,073 =========== ===========
The accompanying notes are an integral part of the financial statements. -3- KRUPP GOVERNMENT INCOME TRUST STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------- ----------------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ----------- Revenues: Interest income - PIMs and PIMIs: Basic interest $ 1,029,551 $ 1,248,030 $ 1,786,104 $ 2,620,518 Additional Loan interest (Note 2) 1,451,120 80,091 1,954,960 160,182 Participation interest (Note 2) 719,682 1,092,626 1,794,493 1,964,251 Interest income - MBS 106,916 451,728 219,464 743,714 Interest income - cash and cash equivalents 45,677 34,949 95,074 90,569 ------------ ------------ ----------- ----------- Total revenues 3,352,946 2,907,424 5,850,095 5,579,234 ------------ ------------ ----------- ----------- Expenses: Asset management fee to an affiliate 48,060 157,141 138,963 327,625 Expense reimbursements to affiliates 57,999 55,377 155,676 92,188 Amortization of prepaid fees and expenses 23,849 248,967 92,758 524,950 General and administrative 92,699 117,574 210,329 219,293 ------------ ------------ ----------- ----------- Total expenses 222,607 579,059 597,726 1,164,056 ------------ ------------ ----------- ----------- Net income 3,130,339 2,328,365 5,252,369 4,415,178 Other comprehensive income: Net change in unrealized gain on MBS (256,683) (199,669) (226,630) (182,230) ------------ ------------ ----------- ----------- Total comprehensive income $ 2,873,656 $ 2,128,696 $ 5,025,739 $ 4,232,948 ============ ============ =========== =========== Basic earnings per Share $ .21 $ .15 $ .35 $ .29 ============ ============ =========== =========== Weighted average Shares outstanding 15,053,135 15,053,135 ========== ==========
The accompanying notes are an integral part of the financial statements. -4- KRUPP GOVERNMENT INCOME TRUST STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, ------------------------------- 2003 2002 ------------ ------------ Operating activities: Net income $ 5,252,369 $ 4,415,178 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of discounts (788) (150,057) Amortization of prepaid fees and expenses 92,758 524,950 Changes in assets and liabilities: Decrease in interest receivable and other assets 264,581 257,062 Decrease in deferred income on Additional Loans (984,385) (160,182) Increase (decrease) in other liabilities (14,487) 96,793 ------------ ------------ Net cash provided by operating activities 4,610,048 4,983,744 ------------ ------------ Investing activities: Principal collections on MBS 560,626 3,210,055 Principal collections on Additional Loans 4,169,991 -- Principal collections on PIMs and Insured Mortgages 40,089,400 34,168,490 ------------ ------------ Net cash provided by investing activities 44,820,017 37,378,545 ------------ ------------ Financing activity: Dividends (31,461,054) (49,825,877) ------------ ------------ Net increase (decrease) in cash and cash equivalents 17,969,011 (7,463,588) Cash and cash equivalents, beginning of period 1,986,243 13,154,231 ------------ ------------ Cash and cash equivalents, end of period $ 19,955,254 $ 5,690,643 ============ ============ Non cash activities: Decrease in unrealized gain on MBS $ (226,630) $ (182,230) ============ ============
The accompanying notes are an integral part of the financial statements. -5- KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS 1. Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in the opinion of Berkshire Mortgage Advisors Limited Partnership (the "Advisor"), which is the advisor to Krupp Government Income Trust (the "Trust"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Financial Statements in the Trust's Form 10-K for the year ended December 31, 2002 for additional information relevant to significant accounting policies followed by the Trust. In the opinion of the Advisor of the Trust, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Trust's financial position as of June 30, 2003, its results of operations for the three and six months ended June 30, 2003 and 2002 and its cash flows for the six months ended June 30, 2003 and 2002. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. 2. PIMs and PIMIs At June 30, 2003, the Trust's remaining PIMI had a fair value of $9,639,526 including a gross unrealized gain of $524,135. Fair value of the FHA insured first mortgage is based on MBS with similar interest rates or on expected payoff proceeds. Fair value includes the estimated collection value of the Additional Loan. Fair value does not include any value for the participation features. The remaining PIMI matures in 2034. At June 30, 2003, the remaining PIMI was not delinquent of principal or interest. Mountain View has been adversely affected by the competitive rental housing market. Based on the Advisor's analysis of market conditions and property operations and their effect on the property's value, the Trust maintains a valuation allowance of $1,032,272 for Mountain View. On May 30, 2003, the Trust received a prepayment of the Windward Lakes Apartments Subordinated Promissory Note and the Windward Lakes Apartments Additional Loan. The Trust received $2,471,294 of Additional Loan principal, $970,575 of Additional Loan interest, $719,682 of Shared Appreciation Interest and $684,291 of accrued interest from the workout agreement that expired in 2000. On June 16, 2003, the Trust received $13,301,440 in principal proceeds on the first mortgage note. In addition, the Trust recognized $373,757 of Additional Loan interest that had been previously received and recorded as deferred income on the Additional Loan. On July 24, 2003, the Trust paid a special dividend of $1.22 per share from the proceeds of the Windward Lakes prepayment. On March 27, 2003, the Trust received a prepayment of the Rivergreens Apartments Subordinated Promissory Note. The Trust received $547,978 of Shared Appreciation Interest and $383,297 of Minimum Additional Interest. On April 10, 2003, the Trust received $9,500,670 representing the principal proceeds on the first mortgage loan from the Rivergreens Apartments PIM. On May 9, 2003, the Trust paid a special dividend of $0.70 per share from the proceeds of the Rivergreens Apartments PIM prepayment. On March 12, 2003, the Trust sold the Lifestyles Ginnie Mae MBS at par of $9,746,038 to the borrower of the Lifestyles PIMI. Concurrently, the borrower paid off the full amount due on the Additional Loan of $1,817,665. In addition, the Trust recognized $343,659 of Additional Loan interest previously recorded as deferred income on the Additional Loan. On May 7, 2003, the Trust paid a special dividend of $0.77 per share from the proceeds of the Lifestyles Apartments PIMI. On January 21, 2003, the Trust received a prepayment of the Mill Pond I PIM of $7,430,727 representing the principal proceeds on the first mortgage. The underlying property value did not increase sufficiently to meet the criteria for the Trust to earn any participating interest. On May 5, 2003, the Trust paid a special dividend of $0.50 per share from the proceeds of the Mill Pond I PIM. Continued -6- KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued 3. MBS At June 30, 2003, the Trust's MBS portfolio had an amortized cost of $5,301,521 and unrealized gains of $225,132. The portfolio has maturities ranging from 2008 to 2032. 4. Changes in Shareholders' Equity A summary of changes in shareholders' equity for six months ended June 30, 2003 is as follows:
Total Accumulated Common Retained Comprehensive Shareholders' Stock Earnings Income Equity ------------ ----------- --------- ------------- Balance at December 31, 2002 $ 60,668,605 $ -- $ 451,762 $ 61,120,367 Net income -- 5,252,369 -- 5,252,369 Dividends (26,208,685) (5,252,369) -- (31,461,054) Change in unrealized gain on MBS -- -- (226,630) (226,630) ------------ ----------- --------- ------------ Balance at June 30, 2003 $ 34,459,920 $ -- $ 225,132 $ 34,685,052 ============ =========== ========= ============
5. Subsequent Event On July 15, 2003, the Trust received a prepayment of the Pointe East Apartments insured mortgage for $3,251,119. The Trust also received a prepayment premium of $130,045 from this payoff. On August 4, 2003, the Trust paid a special dividend of $0.23 per share from the proceeds of the Pointe East Apartments insured mortgage payoff. -7- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and accompanying notes contained in the Trust's 2002 Annual Report on Form 10-K and in this Form 10-Q. Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Trust'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; the inability of the borrower to meet financial obligations on additional loans; 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 Trust and its Affiliates, including the Advisor. Liquidity and Capital Resources At June 30, 2003, the Trust had liquidity consisting of cash and cash equivalents of approximately $20.0 million as well as the cash inflows provided by the remaining PIMI, MBS and cash and cash equivalents. The Trust may also receive additional cash flow from the participation features of its remaining PIMI. The Trust anticipates that these sources will be adequate to provide the Trust with sufficient liquidity to meet its obligations, including providing dividends to its investors. As described more fully below, the Advisor has declared a special dividend related to the Windward Lakes payoff that will result in the distribution of $18.4 million of this cash in the form of a special dividend in the third quarter of 2003. The most significant demands on the Trust's liquidity are quarterly dividends paid to investors of approximately $300,000 and special dividends. Funds for dividends come from interest income received on the remaining PIMI, MBS and cash and cash equivalents net of operating expenses, and the principal collections received on the remaining PIMI and MBS. The portion of dividends funded from principal collections and cash reserves reduces the capital resources of the Trust. As the capital resources of the Trust decrease, the total cash flows to the Trust will also decrease which may result in periodic adjustments to the dividends paid to the investors. The Advisor periodically reviews the dividend rate to determine whether an adjustment is necessary based on projected future cash flows. The current dividend rate is $0.02 per share per quarter. The Trustees, based on the Advisor's recommendations, generally set a dividend rate that provides for level quarterly dividends. To the extent quarterly dividends do not fully utilize the cash available for distribution and cash balances increase, the Advisor may adjust the dividend rate or distribute such funds through a special dividend. In addition to providing guaranteed or insured monthly principal and interest payments from the insured first mortgage, the Trust's investment in the remaining PIMI also may provide additional income through the interest on the Additional Loan portion of the PIMI as well as participation interest based on operating cash flow and an increase in the value realized upon the sale or refinance of the underlying property. However, collection of the Additional Loan principal and interest and interest from the participation feature are neither guaranteed nor insured and depend upon the successful operations of the underlying property. On July 15, 2003, the Trust received a prepayment of the Pointe East Apartments insured mortgage for $3,251,119. The Trust also received a prepayment premium of $130,045 from this payoff. On August 4, 2003, the Trust paid a special dividend of $0.23 per share from the proceeds of the Pointe East Apartments insured mortgage payoff. On May 30, 2003, the Trust received a prepayment of the Windward Lakes Apartments Subordinated Promissory Note and the Windward Lakes Apartments Additional Loan. The Trust received $2,471,294 of Additional Loan principal, $970,575 of Additional Loan interest, $719,682 of Shared Appreciation Interest and $684,291 of accrued interest from the workout agreement that expired in 2000. On June 16, 2003, the Trust received $13,301,440 in principal proceeds on the first mortgage note. In addition, the Trust recognized $373,757 of Additional Loan interest that had been previously received and recorded as deferred income on the Additional Loan. On July 24, 2003, the Trust paid a special dividend of $1.22 per share from the proceeds of the Windward Lakes prepayment. On March 27, 2003, the Trust received a prepayment of the Rivergreens Apartments Subordinated Promissory Note. The Trust received $547,978 of Shared Appreciation Interest and $383,297 of Minimum Additional Interest. On April 10, -8- 2003, the Trust received $9,500,670 representing the principal proceeds on the first mortgage loan from the Rivergreens Apartments PIM. On May 9, 2003, the Trust paid a special dividend of $0.70 per share from the proceeds of the Rivergreens Apartments PIM prepayment. On March 12, 2003, the Trust sold the Lifestyles Ginnie Mae MBS at par of $9,746,038 to the borrower of the Lifestyles PIMI. Concurrently, the borrower paid off the full amount due on the Additional Loan of $1,817,665. In addition, the Trust recognized $343,659 of Additional Loan interest previously recorded as deferred income on the Additional Loan. On May 7, 2003, the Trust paid a special dividend of $0.77 per share from the proceeds of the Lifestyles Apartments PIMI. On January 21, 2003, the Trust received a prepayment of the Mill Pond I PIM of $7,430,727 representing the principal proceeds on the first mortgage. The underlying property value did not increase sufficiently to meet the criteria for the Trust to earn any participating interest. On May 5, 2003, the Trust paid a special dividend of $0.50 per share from the proceeds of the Mill Pond I PIM. The remaining PIMI investment operates under a workout agreement with the Trust. The Mountain View agreement modifies the borrower's obligation to make Additional Loan interest payments, regardless of whether the property generates sufficient revenues to do so, to an obligation to pay Additional Loan interest only if the property generates Surplus Cash, as defined by HUD. The Trust did not receive any Additional Loan interest or Surplus Cash payments from its remaining PIMI during the first six months of 2003. For the underlying property's fiscal year ending December 31, 2002, Mountain View did not generate any Surplus Cash. Mountain View has experienced problems due to competitive market conditions. In June 1999, the Trust approved a second workout. Under its terms, the Trust agreed to reduce the effective interest rate on the insured first mortgage by 1.25% retroactively for 1999 and each year thereafter until 2004, and to change the loan's participation terms. The workout eliminated the preferred return feature, forgave $288,580 of previous accruals of Additional Loan interest related to the first workout, and changed the Trust's participation in Surplus Cash generated by the property and its application towards Additional Loan interest. The Trust will receive 75% of the first $130,667 of Surplus Cash and 50% of any remaining Surplus Cash on an annual basis to pay Additional Loan interest. Unpaid Additional Loan interest related to the second workout will accrue and be payable if there are sufficient proceeds from a sale or refinancing of the property. In addition, the borrower repaid $153,600 of the Additional Loan and funded approximately $54,000 to a reserve for property improvements. Under the restructuring described above, management determined that the new interest rate level of the loan was at or above the then prevailing rate for similar instruments and therefore did not meet the criteria for a troubled debt restructuring. Accordingly, the restructuring and new rate was accounted for prospectively and not as a troubled debt restructuring. During 2002, operating results at Mountain View deteriorated. A building with 20 three-bedroom apartments was out of service for 18 months as a result of a fire in 2001. Reconstruction work necessitated by the fire was completed in mid-2002, with insurance proceeds covering the total cost of the restoration and a portion of the rental income. Additionally, occupancy in the remaining units has been affected by local economic conditions. These factors have made the rental market much more competitive for apartment owners, and the use of concessions to attract potential renters has increased throughout the market. Consequently, rental income was down in 2002. At the same time, both insurance costs and real estate taxes have increased dramatically, further deteriorating operating results. As a result of the factors described above, the Trust maintains a valuation allowance of $1,032,272. Whether the operating performance of Mountain View provides sufficient cash flow from operations to pay either the Additional Loan principal and interest or participation income will depend on factors that the Trust has little or no control over. Should the property be unable to generate sufficient cash flow to pay the Additional Loan interest, it would reduce the Trust's distributable cash flow and could affect the value of the Additional Loan collateral. There are contractual restrictions on the repayment of the remaining PIMI. During the first five years of the investment, the borrower is prohibited from repayment. During the second five years, the borrower can prepay the insured first mortgage and the Additional Loan by satisfying any contractual obligations. The participation feature and Additional Loan are neither insured nor guaranteed. If the prepayment of the PIMI results from the foreclosure on the underlying property or an insurance claim, the Trust would probably not receive any participation income or any amounts due under the Additional Loan. The Trust has the option to call the remaining PIMI by accelerating the maturity if the loan is not prepaid by the tenth year after permanent funding. If the call feature is exercised then the insurance feature of the loan would be canceled. -9- Therefore, the Advisor will determine the merits of exercising the call option for the remaining PIMI as economic conditions warrant. Such factors as the condition of the asset, local market conditions, the interest rate environment and available financing will have an impact on these decisions. Critical Accounting Policies The Trust's critical accounting policies relate to revenue recognition related to the Trust's remaining PIMI investment, impaired mortgage loan, amortization of Prepaid Fees and Expenses and the carrying value of its MBS. The Trust's policies are as follows: The Trust accounts for its MBS portion of a PIM or PIMI investment in accordance with the Financial Accounting Standards Board's Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"), under the classification of held to maturity as these investments have a participation feature. As a result, the Trust would not sell or otherwise dispose of the MBS. Accordingly, the Trust has both the intention and ability to hold these investments to expected maturity. The Trust carries these MBS at amortized cost. The insured mortgage portion of the FHA PIM or FHA PIMI is carried at amortized cost. The Trust holds these mortgages at amortized cost since they are fully insured by FHA. The Additional Loans are carried at amortized cost unless the Advisor of the Trust believes there is an impairment in value, in which case a valuation allowance is established in accordance with FAS 114 "Accounting by Creditors for Impairment of a Loan" and FAS 118 "Accounting by Creditors for Impairment of a Loan- Income Recognition and Disclosures". The Trust, in accordance with FAS 115, classifies its MBS portfolio as available-for-sale. The Trust classifies its MBS portfolio as available-for-sale as a portion of the MBS portfolio may remain after all of the PIMs and PIMIs payoff and that it will be necessary to then sell the remaining MBS portfolio at that time in order to close out the Trust. 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 Trust carries its MBS at fair market value and reflects any unrealized gains (losses) as a separate component of Shareholders' Equity. The Trust amortizes purchase premiums or discounts over the life of the underlying mortgages using the effective interest method. Basic interest is recognized based on the stated rate of the Department of Housing and Urban Development ("HUD") Insured Mortgage loan (less the servicer's fee) or the coupon rate of the Government National Mortgage Association ("GNMA") MBS. The Trust recognizes interest related to the participation features 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 Trust or a cash payment made to the Trust from surplus cash relative to the participation feature. The Trust defers the recognition of Additional Loan interest payments as income to the extent these interest payments were from escrows established with the proceeds of the Additional Loan. When the properties underlying the PIMI's generate sufficient cash flow to make the required Additional Loan interest payments and the Additional Loan value is deemed collectible, the Trust recognizes income as earned and commences amortization of the deferred interest amounts into income over the remaining estimated term of the Additional Loan. During periods where mortgage loans are impaired the Trust suspends amortizing deferred interest. The Trust also fully reserves the portion of any Additional Loan interest payment satisfied through the issuance of an operating loan and any associated interest due on such operating loan. The Trust will recognize the income related to the operating loan when the borrower repays amounts due under the operating loan. Impaired loans are those Additional Loans which the Advisor believes that the collection of all amounts due in accordance with the contractual terms of the loan agreement are not likely. Impaired loans are measured based on the fair value of the underlying collateral net of estimated selling costs. The Trust measures impairment on these loans quarterly using the most current operating information available. Interest received on the impaired loans is applied against the loan principal. Prepaid fees and expenses represent prepaid acquisition fees and expenses and prepaid participation servicing fees paid for the acquisition and servicing of PIMs and PIMIs. The Trust 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 estimated life of the underlying mortgage. The Trust 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 HUD-insured mortgage loan or a GNMA MBS. Upon the repayment of a PIM or PIMI any unamortized acquisition fees and expenses and unamortized participation servicing fees related to such loan are expensed. Results of Operations Net income of the Trust increased for the three months ending June 30, 2003 as compared to the same period ending June 30, 2002 primarily due to an increase in additional loan interest and a decrease in amortization expense. This is partially -10- offset by decreases in basic interest on PIMS, participation interest and interest income on MBS. Additional loan interest increased due to the collection of base interest and the recognition of deferred revenue from the payoff of the Windward Lakes PIMI in May of 2003. Amortization expense decreased due primarily to the Rivergreen Apartments PIM payoff in March of 2003, the River View and Lincoln Green PIM payoffs in 2002 and the full recognition of prepaid fees and expenses for the Lifestyles and Windward Lakes PIMIs in 2002 and Mill Pond I Apartments PIM in January of 2003. Basic interest on PIMs decreased primarily due to the River View and Lincoln Green PIM payoffs in 2002 and the 2003 payoffs of Mill Pond I and the Rivergreen Apartments PIMs and the Lifestyles PIMI. The decrease was partially offset by the accrued workout interest received from the Windward Lakes PIMI payoff. Participation interest decreased due to the collections of participation interest from the River View and Lincoln Green payoffs in 2002 being greater than the participation interest collected from the Windward Lakes payoff in 2003. Interest income on MBS decreased primarily due to the payoffs of the Rosemont Apartments MBS in August of 2002 and the Parkwest Apartments MBS in May of 2002. Net income of the Trust increased for the six months ending June 30, 2003 as compared to the same period ending June 30, 2002 primarily due to an increase in additional loan interest and a decrease in amortization expense. This is partially offset by an increase in expense reimbursement to affiliates and decreases in basic interest income on PIMs and PIMIs and interest income on MBS. Additional loan interest increased due to the collection of base interest and the recognition of deferred revenue from the payoff of the Windward Lakes PIMI in May of 2003. The Trust also recognized deferred revenue from the Lifestyles PIMI payoff in March of 2003. Asset management fees decreased due to principal collections and prepayments. Amortization expense decreased due primarily to the River View, Waterford and Lincoln Green PIM payoffs in 2002 and the full recognition of prepaid fees and expenses for the Mill Pond I PIM in January of 2003 and the Lifestyles and Windward Lakes PIMIs in 2002. Expense reimbursement to affiliates increased due to a change in the estimated cost of services provided to the Trust in 2002. Basic interest income on PIMs and PIMIs decreased due primarily to the payoffs of the Rivergreens Apartments PIM in April of 2003, the Mill Ponds I PIM in January of 2003, the payoffs of the River View and Lincoln Green PIMs in 2002 and the Lifestyles PIMI payoff in March of 2003. The decrease in basic interest income on PIMs and PIMIs was partially offset by accrued interest received from the Windward Lakes payoff in relation to the workout agreement. Interest income on MBS decreased due to the payoffs of the Rosemont Apartments MBS in August of 2002 and the Parkwest Apartments MBS in May of 2002. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Assessment of Credit Risk The Trust's investments in insured mortgages and MBS are guaranteed and/or insured by Fannie Mae, the Federal Home Loan Mortgage Corporation ("FHLMC"), GNMA and 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, and both have significant experience in mortgage securitizations. In addition, their MBS carry the highest credit rating given to financial instruments. GNMA guarantees the full and 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. Collection of the principal and interest of the Additional Loan and interest on the participation features have risks similar to those associated with higher risk debt instruments, including: reliance on the owner's operating skills, ability to maintain occupancy levels, control operating expenses, ability to maintain the properties and obtain adequate insurance coverage. Operations also may be affected by adverse changes in general economic conditions, local conditions, and changes in governmental regulations, real estate zoning laws, or tax laws; and other circumstances over which the Trust may have little or no control. The Trust's investments also include cash and cash equivalents of approximately $19.6 million of Agency paper, which is issued by Government Sponsored Enterprises with a credit rating equal to the top rating category of a nationally recognized statistical rating organization. -11- Interest Rate Risk The Trust's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Trust's net income, comprehensive income or financial condition to adverse movements in interest rates. At June 30, 2003, the Trust's remaining PIMI and MBS comprise the majority of the Trust's assets. Decreases in interest rates may accelerate the prepayment of the Trust's investments. The Trust does not utilize any derivatives or other instruments to manage this risk as the Trust plans to hold its remaining PIMI 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 for any remaining MBS. The Trust monitors prepayments and considers prepayment trends, as well as dividend requirements of the Trust, when setting regular dividend policy. For MBS, the fund forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For its remaining PIMI investment, the Trust continues to monitor the borrower for any indication of a prepayment. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Accounting Officer carried out an evaluation of the effectiveness of the design and operation of the Trust's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Accounting Officer concluded that the Trust's disclosure controls and procedures were effective as of the date of their evaluation in timely alerting them to material information relating to the Trust required to be included in this Quarterly Report on Form 10-Q. (b) Changes in Internal Controls There were no significant changes in the Trust's internal controls or in other factors that could significantly affect such internal controls subsequent to the date of the evaluation described in paragraph (a) above. -12- KRUPP GOVERNMENT INCOME TRUST PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (31.1) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None -13- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Krupp Government Income Trust (Registrant) BY: /s/ Alan Reese ------------------------------------------ Alan Reese Treasurer and Chief Accounting Officer of Krupp Government Income Trust DATE: August 6, 2003 -14- EX-31.1 3 d56594_ex31-1.txt CHIEF EXECUTIVE OFFICER CERTIFICATION Exhibit 31.1 Certifications I, Peter F. Donovan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Krupp Government Income Trust I; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 6, 2003 /s/ Peter F. Donovan -------------------- Peter F. Donovan Chief Executive Officer -15- EX-31.2 4 d56594_ex31-2.txt CHIEF ACCOUNTING OFFICER CERTIFICATION Exhibit 31.2 Certifications I, Alan Reese, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Krupp Government Income Trust I; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 6, 2003 /s/ Alan Reese ------------------------ Alan Reese Chief Accounting Officer -16- EX-32.1 5 d56594_ex32-1.txt CHIEF EXECUTIVE OFFICER CERTIFICATION Exhibit 32.1 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 Quarterly Report of Krupp Government Income Trust (the "Trust") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter F. Donovan, Chief Executive Officer of the Trust, 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 Trust as of June 30, 2003 (the last date of the period covered by the Report). /s/ Peter F. Donovan - ----------------------- Peter F. Donovan, Chief Executive Officer August 6, 2003 -17- EX-32.2 6 d56594_ex32-2.txt CHIEF ACCOUNTING OFFICER CERTIFICATION Exhibit 32.2 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 Quarterly Report of Krupp Government Income Trust (the "Trust") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan Reese, Chief Accounting Officer of the Trust, 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 Trust as of June 30, 2003 (the last date of the period covered by the Report). /s/ Alan Reese - ------------------------ Alan Reese Chief Accounting Officer August 6, 2003 -18- -----END PRIVACY-ENHANCED MESSAGE-----