-----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, RXGjlnMw2yI8b8sf6FALet36i6RUG7hTOa2vtOxfLw4ZHHQRfyiZOOvVApnc9DOV k/rLP0f0+ncrOTHcsBp23w== 0001169232-03-006453.txt : 20031110 0001169232-03-006453.hdr.sgml : 20031110 20031110135522 ACCESSION NUMBER: 0001169232-03-006453 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031110 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: 03987697 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 d57358_10-q.txt FORM 10-Q -------------------------- OMB APPROVAL -------------------------- OMB Number: 3235-0070 Expires: March 31, 2006 Estimated average burden hours per response: 192.00 -------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 (I.R.S. 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) N/A (Former name, former address and former fiscal year, if changed since last report) 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 Rule 12b-2 of the Exchange Act). Yes |_| No |X| SEC 1296 (08-03) Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. -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; pre-payments 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 September 30, December 31, 2003 2002 ------------- ------------ Participating Insured Mortgage Investments ("PIMIs") (Note 2): Insured Mortgages $ 9,098,732 $32,255,154 Additional Loans, net of impairment provision of $1,032,617 and $1,032,272, respectively 367,383 4,537,719 Participating Insured Mortgages ("PIMs") (Note 2) -- 16,949,637 Mortgage-Backed Securities and insured mortgage loan ("MBS") (Note 3) 2,007,482 6,313,121 ----------- ----------- Total mortgage investments 11,473,597 60,055,631 Cash and cash equivalents 1,537,592 1,986,243 Interest receivable and other assets 76,293 370,542 Prepaid acquisition fees and expenses, net of accumulated amortization of $738,546 -- 46,160 Prepaid participation servicing fees, net of accumulated amortization of $683,812 -- 62,497 ----------- ----------- Total assets $13,087,482 $62,521,073 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans $ 367,383 $ 1,351,768 Other liabilities 39,208 48,938 ----------- ----------- Total liabilities 406,591 1,400,706 ----------- ----------- Shareholders' equity (Note 4): Common stock, no par value; 17,510,000 Shares authorized; 15,053,135 Shares issued and outstanding 12,516,459 60,668,605 Accumulated comprehensive income 164,432 451,762 ----------- ----------- Total Shareholders' equity 12,680,891 61,120,367 ----------- ----------- Total liabilities and Shareholders' equity $13,087,482 $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 Nine Months Ended September 30, Ended September 30, -------------------------- ----------------------------- 2003 2002 2003 2002 --------- ---------- ----------- ----------- Revenues: Interest income - PIMs and PIMIs: Basic interest $ 156,481 $ 955,937 $ 1,942,585 $ 3,576,455 Additional Loan interest (Note 2) -- 80,090 1,954,960 240,272 Participation interest (Note 2) -- -- 1,794,493 1,964,251 Interest income - MBS 201,293 380,510 420,757 1,124,224 Interest income - cash and cash equivalents 16,724 44,047 111,798 134,616 --------- ---------- ----------- ----------- Total revenues 374,498 1,460,584 6,224,593 7,039,818 --------- ---------- ----------- ----------- Expenses: Asset management fee to an affiliate 23,450 119,057 162,413 446,682 Expense reimbursements to affiliates 57,999 55,377 213,675 147,565 Amortization of prepaid fees and expenses 15,899 95,679 108,657 620,629 General and administrative 92,501 133,780 302,830 353,073 --------- ---------- ----------- ----------- Total expenses 189,849 403,893 787,575 1,567,949 --------- ---------- ----------- ----------- Net income 184,649 1,056,691 5,437,018 5,471,869 Other comprehensive income: Net change in unrealized gain on MBS (60,700) 43,027 (287,330) (139,203) --------- ---------- ----------- ----------- Total comprehensive income $ 123,949 $1,099,718 $ 5,149,688 $ 5,332,666 ========= ========== =========== =========== Basic earnings per Share $ .01 $ .07 $ .36 $ .36 ========= ========== =========== =========== 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 Nine Months Ended September 30, ------------------------------- 2003 2002 ------------ ------------ Operating activities: Net income $ 5,437,018 $ 5,471,869 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of discounts (32,788) (174,940) Amortization of prepaid fees and expenses 108,657 620,629 Changes in assets and liabilities: Decrease in interest receivable and other assets 294,249 374,913 Decrease in deferred income on Additional Loans (984,385) (240,272) Decrease in other liabilities (9,730) (809) ------------ ------------ Net cash provided by operating activities 4,813,021 6,051,390 ------------ ------------ Investing activities: Principal collections on MBS 4,051,097 8,364,163 Principal collections on Additional Loans 4,170,336 -- Principal collections on PIMs and Insured Mortgages 40,106,059 47,933,263 ------------ ------------ Net cash provided by investing activities 48,327,492 56,297,426 ------------ ------------ Financing activity: Dividends (53,589,164) (72,405,580) ------------ ------------ Net decrease in cash and cash equivalents (448,651) (10,056,764) Cash and cash equivalents, beginning of period 1,986,243 13,154,231 ------------ ------------ Cash and cash equivalents, end of period $ 1,537,592 $ 3,097,467 ============ ============ Non cash activities: Decrease in unrealized gain on MBS $ (287,330) $ (139,203) ============ ============
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 September 30, 2003, its results of operations for the three and nine months ended September 30, 2003 and 2002 and its cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the three and nine months ended September 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 September 30, 2003, the Trust's remaining PIMI had a fair value of $9,098,732. 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 September 30, 2003, the remaining PIMI was not delinquent of principal or interest. The Mountain View Additional Loan was scheduled to mature in September 2003. When the Trust entered into the second workout agreement in June 1999, it was the Trust's intention to extend the maturity date of the Additional Loan to coincide with the expiration date of the interest rebate in December of 2004. While reviewing the existing Additional Loan Agreement, the Advisor noted that the maturity date of the Additional Loan was not updated at the time of the second workout agreement. On September 8, 2003, the Advisor entered into a third modification with the borrower to extend the maturity date to December 31, 2004 to correct this oversight. 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 $1,032,617 for Mountain View. Between the valuation allowance and the related deferred income on Additional Loans liability account, the Mountain View additional loan has been effectively fully reserved. 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. Continued -6- KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued ---------- 2. PIMs and PIMIs, continued 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 received and 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. 3. MBS At September 30, 2003, the Trust's MBS portfolio had an amortized cost of $1,843,050 and unrealized gains of $164,432. The portfolio has maturities ranging from 2008 to 2023. 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. 4. Changes in Shareholders' Equity A summary of changes in Shareholder's equity for the nine months ended September 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 -- 5,437,018 -- 5,437,018 Dividends (48,152,146) (5,437,018) -- (53,589,164) Change in unrealized gain on MBS -- -- (287,330) (287,330) ------------ ----------- --------- ------------ Balance at September 30, 2003 $ 12,516,459 $ -- $ 164,432 $ 12,680,891 ============ =========== ========= ============
-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 report on Form 10-Q. Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this 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 September 30, 2003, the Trust had liquidity consisting of cash and cash equivalents of approximately $1.5 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. 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 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, 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. -8- 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 received and 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, Mountain View, 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 nine 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 of Mountain View. 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 through 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. The Mountain View Additional Loan was scheduled to mature in September 2003. When the trust entered into the second workout agreement in June 1999, it was the Trust's intention to extend the maturity date of the Additional Loan to coincide with the expiration date of the interest rebate in December of 2004. While reviewing the existing Additional Loan Agreement, the Advisor noted that the maturity date of the Additional Loan was not updated at the time of the second workout agreement. On September 8, 2003, the Advisor entered into a third modification with the borrower to extend the maturity date to December 31, 2004 to correct this oversight. 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. This trend has continued through 2003. 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 and is not expected to improve in 2003. 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 for Mountain View of $1,032,617. Between the valuation allowance and the related deferred income on Additional Loans liability account, the Mountain View additional loan has been effectively fully reserved. 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 no contractual restrictions on the repayment of the remaining PIMI. 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. -9- 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. 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 accounted 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 had both the intention and ability to hold these investments to expected maturity. The Trust carried 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. -10- Results of Operations Net income of the Trust decreased for the three months ending September 30, 2003 as compared to the same period ending September 30, 2002 primarily due to decreases in basic interest income on PIMs and PIMIs, Additional Loan interest and interest income on MBS. This decrease is partially offset by decreases in asset management fees and amortization expense. Basic interest income on PIMs and PIMIs decreased primarily due to the payoffs of the Rivergreens Apartments PIM in April of 2003, the Mill Pond I PIM in January of 2003 and the payoffs of the Windward Lakes and Lifestyles PIMIs in June and March of 2003, respectively. Additional Loan interest decreased due to the payoff of the Windward Lakes Additional Loan in May of 2003. Interest income on MBS decreased primarily due to the payoff of the Pointe East Apartments MBS in July of 2003 and the Rosemont Apartments MBS in August 2002. This decrease is partially offset by the prepayment premium received from the Pointe East payoff. Asset management fees decreased due to the decline in the Trust's asset base as a result of principal collections and prepayments. Amortization expense decreased primarily due to the Rivergreen Apartments PIM payoff in April of 2003 and the full amortization of the remaining prepaid fees and expenses on the Windward Lakes PIMI and the Mill Pond I Apartments PIM in 2002 and January of 2003, respectively. Net income of the Trust decreased slightly for the nine months ending September 30, 2003 as compared to the same period ending September 30, 2002 primarily due to decreases in basic interest income on PIMs and PIMIs, participation interest and interest income on MBS and an increase in expense reimbursement to affiliates. This decrease is partially offset by an increase in Additional Loan interest and decreases in asset management fees and amortization expense. Basic interest income on PIMs and PIMIs decreased due primarily to the payoffs of the Rivergreen Apartments PIM in April of 2003, the Mill Pond I Apartments PIM in January of 2003, the payoffs of the River View and Lincoln Green PIMs in 2002 and the payoffs of the Windward Lakes PIMI in June of 2003 and the Lifestyles PIMI 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. Participation interest decreased due to the collections from the Windward Lakes, Lifestyles and Rivergreen Apartments payoffs in 2003 being less than the collections received from the Lincoln Green, River View and Waterford payoffs in 2002. Interest income on MBS decreased primarily due to the payoffs of the Rosemont Apartments and Parkwest Apartments MBS in 2002 and on-going single-family MBS principal collections. The decrease in interest income on MBS is partially offset by the prepayment premium received from the Pointe East payoff. Expense reimbursement of affiliates increased due to a change in the estimated cost of services provided to the Trust in 2002. 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 and the recognition of deferred revenue from the Lifestyles PIMI payoff in March of 2003. Asset management fees decreased due to the decline in the Trust's asset base as a result of principal collections and prepayments. Amortization expense decreased due primarily to the River View, Waterford and Lincoln Green PIM payoffs in 2002, the Rivergreen Apartments PIM payoff in April of 2003 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Assessment of Credit Risk The Trust's investments in its remaining insured mortgage 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 -11- 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 $1.1 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. 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 September 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. Increases in interest rates may decrease the proceeds from a sale of the MBS. 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 incorporates prepayment assumptions into planning as the property notifies the Trust of the intent to prepay or as it matures. 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 -------- (10.1) Third Modification Agreement dated September 8, 2003, by and among Krupp Government Income Trust, a Massachusetts business trust; Mountain View, LTD, an Alabama limited partnership; and Philip P. Mulkey, Henry V. Bragg and Gregory V. Bragg. (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: October 30, 2003 -14- EX-10.1 3 d57358_ex10-1.txt THIRD MODIFICATION AGREEMENT Exhibit 10.1 THIRD MODIFICATION AGREEMENT This Third Modification Agreement is made and entered into as of the 8th day of September 2003 by and among KRUPP GOVERNMENT INCOME TRUST, a Massachusetts business trust ("GIT"); MOUNTAIN VIEW, LTD., and Alabama limited partnership (the "Partnership"); and Philip P. Mulkey, Henry V. Bragg and Gregory V. Bragg (collectively, the "Partners"). WHEREAS, the Partnership agreed to pay additional interest to GIT pursuant to a subordinated promissory note (the "Subordinated Note") made by the Partnership in favor of GIT, which is secured by a subordinated multifamily mortgage (the "Subordinated Mortgage") dated April 21, 1992 (collectively, the "Subordinated Loan Documents"); WHEREAS, the Partners have executed an Additional Loan Agreement and an Additional Loan Note evidencing additional indebtedness of the Partners to GIT of One Million Five Hundred Fifty Three Thousand Six Hundred and no/100 Dollars ($1,553,600.00) (the "Additional Loan"), which Additional Loan is secured by Pledge and Security Agreements and UCC financing statements with all documents dated April 21, 1992 (collectively, the "Additional Loan Documents"); WHEREAS, certain terms of the Subordinated Loan Documents and the Additional Loan Documents have been modified in the Modification Agreement dated July 1, 1995 and the Second Modification Agreement dated June 28, 1999 (collectively, the "Modification Agreements"); WHEREAS, in accordance with the terms of the Subordinated Loan Documents, the Additional Loan Documents, and the Modification Agreements, the Additional Loan Note matures and is due and payable in full on the tenth anniversary of the Final Endorsement, which is September 16, 2003; WHEREAS, the undersigned parties have mutually agreed to extend the maturity date of the Additional Loan Note all as hereinafter set forth; NOW THEREFORE, in consideration of the foregoing recitals, the mutual covenants hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound, the undersigned parties hereby agree as follows: 1. Extension of Additional Loan Note Section A of the Additional Loan Note is hereby amended to read in its entirety as follows: Unless otherwise accelerated as provided herein or in the Additional Loan Agreement, the outstanding principal balance shall be payable on December 31, 2004 (the "Payment Date"). 2. Conditions Precedent Notwithstanding any contrary provision, this Third Modification Agreement is not effective unless and until GIT receives counterparts of this document executed by each party named on the signature page or pages of this document and this document has been executed and delivered by GIT. 3. Ratifications To induce GIT to enter into this Third Modification Agreement, the Partnership and the Partners (a) ratify and confirm all provisions of the Subordinated Loan Documents, the Additional Loan Documents and the Modification Agreements as amended by this document, (b) ratify and confirm that all guaranties, assurances, and Liens (as defined in the Subordinated Loan Documents, the Additional Loan Documents and the Modification Agreements) granted, conveyed or assigned to GIT under the Subordinated Loan Documents, the Additional Loan Documents and the Modification Agreements (as they have been renewed, extended, and amended) are not released, reduced, or otherwise adversely affected by this document and continue to guarantee, assure, and secure full payment and performance of the present and future indebtedness arising hereunder, and (c) agree to perform those acts and duly authorize, execute, acknowledge, deliver, file, and record those additional documents as GIT may request in order to create, perfect, preserve, and protect those guarantees, assurances, and Liens. -19- 4. Representations To induce GIT to enter into this Third Modification Agreement, the Partnership and Partners represent and warrant to GIT that as of the date of this document (a) the Partnership and Partners have all requisite authority and power to execute, deliver and perform their respective obligations under this document, which execution, delivery, and performance have been duly authorized by all necessary actions, require no action by or filing with any governmental authority, do not violate any of the Partnership's organizational documents or violate any law applicable to any of the Partnership's or Partners' or any material agreement to which they or their assets are bound, (B) upon execution and delivery by all parties to it, this documents will constitute the Partnership's and Partners' legal and binding obligation, enforceable against each of them in accordance with this document's terms except as that enforceability my be limited by debtor relief laws and general principles of equity, (c) all other representations and warranties in the Subordinated Loan Documents, the Additional loan Documents, and the Modification Agreements are true and correct in all material respects except to the extent that any of them speak to a different specific date, and (d) no Default or Event of Default exists. 5. Miscellaneous Except as specifically amended and modified in this Third Modification Agreement, the Subordinated Loan Documents, the Additional Loan Documents and the Modification Agreements are unchanged and continue in full force and effect. The parties hereto have caused this Third Modification Agreement to be duly executed as of the date first written above. -20- PARTNERSHIP: Mountain View LTD,. An Alabama limited partnership By: /s/ Philip P. Mulkey ------------------------------------ Name: Philip P. Mulkey Title: General Partner PARTNERS: /s/ Philip P. Mulkey ------------------------------------ Philip P. Mulkey /s/ Henry V. Bragg ------------------------------------ Henry V. Bragg /s/ Gregory V. Bragg ------------------------------------ Gregory V. Bragg GIT: Krupp Government Income Trust, a Massachusetts business trust By: Berkshire Mortgage Advisors Limited Partnership, its Advisor By: BRF Corporation, a general partner By: /s/ Carol J. C. Mills ------------------------------------ Name: Carol J.C. Mills Title: Vice President -21- EX-31.1 4 d57358_ex31-1.txt CEO 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: October 30, 2003 /s/ Peter F. Donovan ----------------------- Peter F. Donovan Chief Executive Officer -15- EX-31.2 5 d57358_ex31-2.txt CAO 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: October 30, 2003 /s/ Alan Reese ------------------------ Alan Reese Chief Accounting Officer -16- EX-32.1 6 d57358_ex32-1.txt CEO 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 September 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 September 30, 2003 (the last date of the period covered by the Report). /s/ Peter F. Donovan - ------------------------ Peter F. Donovan, Chief Executive Officer Date: October 30, 2003 -17- EX-32.2 7 d57358_ex32-2.txt CAO 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 September 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 September 30, 2003 (the last date of the period covered by the Report). /s/ Alan Reese - ------------------- Alan Reese Chief Accounting Officer Date: October 30, 2003 -18- -----END PRIVACY-ENHANCED MESSAGE-----