-----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, KvY12kSMWU5dKeHnAea+55il2G1GSs2yCwa0iMfAgd6o+z7XKGq17RBVeHoqQpuW 529i0tEhGIa5cXSAjitndA== 0000872467-97-000016.txt : 19971114 0000872467-97-000016.hdr.sgml : 19971114 ACCESSION NUMBER: 0000872467-97-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP GOVERNMENT INCOME TRUST-II CENTRAL INDEX KEY: 0000872467 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043073045 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20164 FILM NUMBER: 97714212 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 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEx SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 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 0-20164 Krupp Government Income Trust II Massachusetts 04-3073045 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (617) 423-2233 (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 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. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. KRUPP GOVERNMENT INCOME TRUST II
BALANCE SHEETS ASSETS September 30, December 31, 1997 1996 Participating Insured Mortgages Investments ("PIMIs") Insured mortgages(Note 2) $145,891,556 $150,454,030 Additional loans(Note 2) 29,152,351 29,952,351 Participating Insured Mortgages ("PIMs")(Note 2) 49,325,181 49,622,337 Mortgage-Backed Securities and multi family insured mortgage loan("MBS")(Note 3) 40,895,658 40,581,650 Total mortgage investments 265,264,746 270,610,368 Cash and cash equivalents (Note 2) 12,914,092 9,214,592 Prepaid acquisition fees and expenses, net of accumulated amortization of $5,702,094 and $4,510,838 10,781,548 11,972,804 Prepaid participation servicing fees, net of accumulated amortization of $1,726,670 and $1,260,283 3,767,877 4,234,264 Interest receivable and other assets 1,848,998 2,264,687 Total assets $294,577,261 $298,296,715 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans (Note 5) $ 2,256,973 $ 1,582,054 Other liabilities 23,036 27,085 Total liabilities 2,280,009 1,609,139 Commitments (Note 2) Shareholders' equity: (Note 4) Common Stock, no par value; 25,000,000 shares authorized and 18,371,477 shares outstanding 291,965,290 296,565,241 Unrealized gain on MBS 331,962 122,335 Total Shareholders' equity 292,297,252 296,687,576 Total liabilities and Shareholders' equity $294,577,261 $298,296,715 The accompanying notes are an integral part of the financial statements.
-3- KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenues: Interest income - PIMs and PIMIs: Base interest $3,483,530 $3,465,244 $ 10,474,164 $ 10,443,989 Additional loan interest 693,294 380,495 1,722,205 1,141,485 Participation interest 1,067,176 212,316 1,719,701 692 298 Interest income - MBS 676,796 764,253 2,112,536 2,379,465 Interest income - other 151,969 113,122 408,447 396,663 Total revenues 6,072,765 4,935,430 16,437,053 15,053,900 Expenses: Asset management fee to an affiliate 503,256 515,109 1,503,977 1,545,307 Expense reimbursements to affiliates 108,482 122,480 337,874 341,394 Amortization of prepaid expenses, fees and organization costs 599,818 528,565 1,657,643 1,561,256 General and administrative 72,942 63,099 314,211 259,529 Total expenses 1,284,498 1,229,253 3,813,705 3,707,486 Net income $4,788,267 $3,706,177 $ 12,623,348 $11,346,414 Earnings per share $ .26 $ .20 $ .69 $ .62 Weighted average shares outstanding 18,371,477 18,371,477
-4- The accompanying notes are an integral part of the financial statements. KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1997 1996 Operating activities: Net income $ 12,623,348 $11,346,414 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization 82,087 135,898 Amortization of prepaid expenses and fees and organization costs 1,657,643 1,561,256 Changes in assets and liabilities: Decrease in interest receivable and other assets 415,689 243,472 Increase (decrease) in other liabilities (4,049) (1,206) Net cash provided by operating activities 14,774,718 13,285,834 Investing activities: Investment in PIMs and Insured Mortgages - (5,615,879) Investment in Additional Loans (465,000) - Investment in MBS - (591,600) Prepayment of additional loan including participating appreciation interest 1,265,000 - Principal collections on MBS 3,328,820 5,902,024 Principal collections on PIMs 1,344,342 1,209,978 Increase in deferred income on Additional Loans 674,919 582,355 Net cash provided by investing activities 6,148,081 1,486,878 Financing activity: Dividends (17,223,299) (17,223,301) Net increase (decrease)in cash and cash equivalents 3,699,500 (2,450,589) Cash and cash equivalents, beginning of period 9,214,592 11,675,494 Cash and cash equivalents, end of period $ 12,914,092 $ 9,224,905 Supplemental disclosure of non-cash investing activities: Reclassification of investment in a PIMI to an MBS $ 3,515,288 $ -
-6- The accompanying notes are an integral part of the financial statements. KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS 1. Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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"), the Advisor to Krupp Government Income Trust II (the "Trust"), the disclosures contained in this report are adequate to make the information presented not misleading. The Trust accounts for all of its investment in Mortgage Backed Securities, including those that are part of a PIM or PIMI investment in accordance with Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Federal Housing Administration Participating Insured Mortgages and all Additional Loans are carried at cost less principal payments unless the Advisor of the Trust believes there is a impairment in value, in which case a valuation allowance is established in accordance with Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, and Financial Accounting Standard No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. See Notes to Financial Statements in the Trust s Form 10-K for the year ended December 31, 1996 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 primarily of only normal recurring accruals) necessary to fairly present the Trust's financial position as of September 30, 1997, its results of operations for the three and nine months ended September 30, 1997 and 1996, and its cash flows for the nine months ended September 30, 1997 and 1996. The results of operations for the three and nine months ended September 30, 1997 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 During the second quarter 1997, the Trust advanced an additional $465,000 to the owner of the Willows Apartments, increasing the Additional Loan to $1,265,000. During the third quarter of 1997, as a result of a sale of the property to a third party, the Trust accepted a full payoff of the $1,265,000 Additional Loan and received all of its Preferred Interest of $302,520 that was earned as of the date of the sale. In conjunction with the payoff of the Additional -8- Loan, the Trust converted the investment from a PIMI to an insured mortgage and fully amortized the deferred mortgage costs associated with the Additional Loan. At September, 30, 1997, the Trust has commitments to fund approximately $1,006,000 on its closed PIMs and PIMIs. These commitments will be funded by cash on hand and future principal collections from the MBS, PIMs and insured mortgages. KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS, Continued 3. MBS At September 30, 1997, the Trust's MBS portfolio has an amortized cost of $40,563,696 and gross unrealized gains and losses of approximately $481,570 and $149,608. The MBS portfolio has maturities ranging from 2008 to 2023. 4. Changes in Shareholders' Equity A summary of changes in shareholders' equity for the nine months ended September 30, 1997 is as follows:
Total Common Retained Unrealized Shareholders' Stock Earnings Gain (Loss) Equity Balance at December 31, 1996 $296,565,241 $ - $122,335 $296,687,576 Net income - 12,623,348 - 12,623,348 Dividends (4,599,951) (12,623,348) - (17,223,299) Change in unrealized gain on MBS - - 209,627 209,627 Balance at September 30, 1997 $291,965,290 $ - $ 331,962 $292,297,252
5. Related Party Transactions During the three and nine months ended September 30, 1997, the Trust earned $852,357 and $1,107,089, respectively, of interest payments on Additional Loans with an affiliate of the Advisor, as compared to $147,761 and $295,522, respectively, during the three and nine months ended September 30, 1996. -10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management s expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results maydiffer materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources At September 30, 1997 the Trust has significant liquidity consisting of cash and cash equivalents, of approximately $12.9 million as well as the cash inflows provided by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also receive additional cash flow from the participation features of its PIMs and PIMIs. 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 demand on the Trust's liquidity are quarterlydividends paid to investors of approximately $5.7 million. Funds for dividends come from interest income received on PIMs, PIMIs, MBS and cash and cash equivalents net of operating expenses, and the principal collections received on PIMs, PIMIs and MBS. The portion of dividends funded from principal collections 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. During the second quarter of 1997, the Trust funded an additional $465,000 to the owner of the Willows Apartments increasing the Additional Loan amount to $1,265,000. Subsequent to the funding, the owner notified the Trust of its intention to sell the property to a third party during the third quarter. During the third quarter of 1997, the Trust received the prepayment of the Additional Loan of $1,265,000 and the payment of$789,336 which represents all of the Preferred Interest due on the Trust s investment through the date of sale. In addition the Trust allowed the purchaser to assume the first mortgage. The Trust converted the Willows Apartment PIMI to an insured mortgage. Windmill Lakes operating performance during the third quarter continued to be adversely affected by the highly competitive housing market in Pembroke Pines, Florida. New construction in all housing sectors is being fueledby strong job and population growth in the area. Builders marketing concessions to fill new properties lowers the cost of renting a new apartment and makes it more difficult for older properties like Windmill Lakes to attract residents. The borrower has informed the Advisor that the property is being marketed for sale. Should the borrower be unable to obtain a purchase offer adequate to cover the property s outstanding liabilities, the Advisor anticipates that some measure of debt service relief will be necessary until the market stabilizes. The Advisor continues to monitor this property closely. The borrower on the Estate PIM has informed the Advisor that a sale of the property is pending to one of the Trust s affiliated entities. To facilitate the sale transaction, the borrower asked and the Advisor agreed to release the participation features of the PIM and allow the purchaser to assume the obligations of the first mortgage loan. In exchange for this modification, the Advisor will require the borrower to pay a settlement that will provide the Trust a financial return that will be comparable to what the Trust would have expected to receive had the borrower continued to own the property. The PIM will convert to an insured mortgage when the transaction is completed. -11- In addition to funding its quarterly dividends paid to investors the Trust has a remaining commitment of approximately $1.0 million on a PIM in the construction phase. The Trust has sufficient cash reserves to fund this commitment. The Advisor of the Trust periodically reviews the dividend rate to determine whether an adjustment is necessary based on projected future cash flows. Based on current projections, the Advisor believes the Trust can maintain the current dividend rate for the foreseeable future. In general, the Advisor tries to set a dividend rate that provides for level quarterly distributions. To the extent quarterly dividends do not fully utilize the cash available for distribution and cash balances increase, the Advisor may reinvest the available proceeds, adjust the dividend rate or distribute such funds through a special distribution. For the first five years of the PIMs and PIMIs the borrowers are prohibited from prepaying. For the second five years, the borrowers can prepay the loans incurring a prepayment penalty for PIMs or paying all amounts due under the PIMIs and satisfying the required preferred return. The Trust has the option of calling certain PIMs and all the PIMIs by accelerating their maturity if the loans are not prepaid by the tenth year after permanent funding. The Trust will determine the merits of exercising the call option for each PIM or PIMI as economic conditions warrant. Such factors as the condition of the asset, local market conditions, interest rates and available financing will have an impact on this decision. Assessment of Credit Risk The Trust's investments in mortgages, with the exception of the Additional Loans, are guaranteed or insured by the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), and the Department of Housing and Urban Development ("HUD"), and therefore, the certainty of the cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. FNMA is a federally chartered private corporation that guarantees obligations originated under its programs. However, obligations of FNMA are not backed by the U.S. Government. FNMA is one of the largest corporations in the United States and the Secretary of the Treasury of the United States has discretionary authority to lend up to $2.25 billion to FNMA at any time. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. HUD, an agency of the U.S. Government, insures the obligations originated under its programs which are backed by the full faith and credit of the U.S. Government. The Trust's Additional Loans have similar risks as those associated with conventional real estate lending, including: reliance on the owner's operating skills and ability to maintain occupancy levels, control operating expenses, maintain properties and obtain adequate insurance coverage; adverse changes in general economic conditions, adverse local conditions, and changes in governmental regulations, real estate zoning laws, or tax laws; and other circumstances over which the Trust may have little or no control. Operations -12- The following discussion relates to the operations of the Trust during the three and nine months ended September 30, 1997 and 1996. The Trust s net income increased significantly during the third quarter of 1997 as compared to the third quarter of 1996 due to increases in participation interest and additional loan interest of $854,860 and $312,799. The increase in additional loan interest is due to the Trust receiving and recognizing as interest income additional loan interest payments from The Seasons. The increase in participation interest is attributable to the Trust receiving a preferred return of $789,336 related to the prepayment of the Willows Additional Loan as well as participation income from The Seasons, Sunset Summit, The Lakes, Martin s Landing, Windsor Lake and Oasis at Springtree of $83,360, $60,000, $57,728, $40,495, $28,194 and $8,064. This was offset by decreases in MBS interest of $87,457. The Trust s net income increased significantly during the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996 due to increases in additional loan interest and participation interest of $580,720 and $1,027,403, respectively. The increase in additional loan interest is due to the Trust receiving and recognizing as interest income additional loan interest payments from The Seasons. The increase in participation interest is attributable to the Trust receiving a preferred return of $789,336 related to the prepayment of the Willows Additional Loan as well as participation income from St. Germain, The Lakes, Martins Landing, The Seasons, Oasis at Springtree, Windsor Lakes, Mequon Trail, Sunset Summit, Crossing Village and The Willows Apartments of $228,313, $185,560, $94,704, $83,360, $80,670, $80,652, $72,105, $60,000, $25,000 and $20,000, respectively. This was offset by a decrease in MBS interest of $266,929 and increases in general and administration and amortization expenses of $54,682 and $96,387, respectively. As principal collections reduce the Trust s investments in MBS, PIMs and PIMIs , interest income on MBS and base interest income on PIMs and PIMIs will decline. The Trust funds a portion of dividends with principal collections which will continue to reduce the asset base generating income for the Trust in the future. -13- KRUPP GOVERNMENT INCOME TRUST II PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None 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 II (Registrant) BY:/s/Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Government Income Trust II DATE: October 28, 1997 -15- EX-27 2
5 The schedule contains summary financial information extracted from the balance sheet and statement of income and is qualified in it's entirety by reference to such financial statements. 0000872467 KRUPP GOVERNMENT INCOME TRUST-II 9-MOS DEC-31-1997 SEP-30-1997 12,914,092 265,264,746 1,848,998 0 0 14,549,425 0 0 294,577,261 2,280,009 0 0 0 291,965,290 331,962 294,577,261 0 16,437,053 0 0 3,813,705 0 0 12,623,348 0 12,623,348 0 0 0 12,623,348 0 0 Includes Participating Insured Mortgage Investments ("PIMI's") (insured mortgages of $145,891,556 and Additional Loans of $29,152,351), Participating Insured Mortgages ("PIMs") of $49,325,181 and Mortgage-backed Securities ("MBS") of $40,895,658. Includes prepaid acquisition fees and expenses of $16,483,642 net of accumulated amortization of $5,702,094 and prepaid participation servcing fees of $5,494,547 net of accumulated amortization of $1,726,670. Includes deferred income on Additional Loans of $2,256,973. Unrealized gain on MBS. Represents interest income on investments in mortgages and cash. Includes $1,657,673 of amortization of prepaid fees and expenses.
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