-----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, FrmpSIi8869R1wUCmQgs3u4wm9tZOk1JODOycK/SsvFS34MiKwmsW8/5PqUCIsvR 5jQyKs/zNLodxGgdFJq4bw== 0000872467-98-000006.txt : 19980504 0000872467-98-000006.hdr.sgml : 19980504 ACCESSION NUMBER: 0000872467-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980430 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: 98605966 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 THE SECURITIES x EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 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 -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. 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 March 31, December 31, 1998 1997 Participating Insured Mortgage Investments ("PIMIs")(Note 2): Insured mortgages $145,175,884 $145,537,234 Additional loans 29,152,351 29,152,351 Participating Insured Mortgages ("PIMs") (Note 2) 37,569,147 37,645,082 Mortgage-Backed Securities ("MBS") (Note 3) 49,804,057 51,171,301 Total mortgage investments 261,701,439 263,505,968 Cash and cash equivalents 14,656,337 13,520,091 Prepaid acquisition fees and expenses, net of accumulated amortization of $ 6,496,265 and $6,099,180, respectively 9,987,377 10,384,462 Prepaid participation servicing fees, net of accumulated amortization of $ 1,987,080 and $1,858,497, respectively 3,507,467 3,636,050 Interest receivable and other assets 1,644,290 2,111,153 Total assets $291,496,910 $293,157,724 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans (Note 5) $ 2,586,142 $ 2,755,705 Other liabilities 33,822 30,949 Total liabilities 2,619,964 2,786,654 Commitments (Note 2) Shareholders' equity (Note 4): Common stock, no par value; 25,000,000 Shares authorized; 18,371,477 Shares issued and outstanding 288,410,028 289,864,327 Unrealized gain on MBS 466,918 506,743 Total Shareholders' equity 288,876,946 290,371,070 Total liabilities and Shareholders' equity $291,496,910 $293,157,724
The accompanying notes are an integral part of the financial statements. -3-
KRUPP GOVERNMENT INCOME TRUST II STATEMENTS OF INCOME For the Three Months Ended March 31, 1998 1997 Revenue: Interest income - PIMs and PIMIs: Base interest $3,136,987 $3,354,091 Additional loan interest 511,987 611,468 Participation interest 694,354 491,525 Interest income - MBS 958,292 729,182 Interest income - other 188,905 120,712 Total revenue 5,490,525 5,306,978 Expenses: Asset management fee to an affiliate 484,951 504,443 Expense reimbursements to affiliates 108,483 120,910 Amortization of prepaid fees and expenses 525,668 534,747 General and administrative 84,622 134,262 Total expenses 1,203,724 1,294,362 Net income $4,286,801 $4,012,616 Earnings per Share $ .23 $ .22 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 Three Months Ended March 31, 1998 1997 Operating activities: Net income $ 4,286,801 $4,012,616 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization 27,370 23,329 Amortization of prepaid fees and expenses 525,668 534,747 Changes in assets and liabilities: Decrease in interest receivable and other assets 466,863 620,507 Increase (decrease) in other liabilities 2,873 (20,798) Net cash provided by operating activities 5,309,575 5,170,401 Investing activities: Principal collections on MBS 1,300,049 1,217,480 Principal collections on PIMs 437,285 429,608 Increase (decrease) in deferred income on Additional Loans (169,563) 74,492 Net cash provided by investing activities 1,567,771 1,721,580 Financing activity: Dividends (5,741,100) (5,741,100) Net increase in cash and cash equivalents 1,136,246 1,150,881 Cash and cash equivalents, beginning of period 13,520,091 9,214,592 Cash and cash equivalents, end of period $14,656,337 $10,365,473
-6- The accompanying notes are an integral part of the financial statements. -7- KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS 1.Accounting PoliciesCertain 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 AAdvisor@ to Krupp Government Income Trust II (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, 1997 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 normal recurring accruals) necessary to present fairly the Trust's financial position as of March 31, 1998 and the results of its operations and its cash flows for the three months ended March 31, 1998 and 1997.The results of operations for the three months ended March 31, 1998 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 March 31, 1998, the Trust has a commitment to fund approximately $1,006,000 on a closed PIM. This commitment will be funded by cash on hand and future principal collections from the MBS, PIMs and PIMIs. At March 31, 1998, the Trust=s PIMs and PIMIs have a fair value of approximately $208,265,705 and gross unrealized losses of approximately $3,631,677. The PIMs and PIMIs have maturities ranging from 2008 to 2036. At March 31, 1998 there are no insured mortgage loans within the Trusts portfolio that are delinquent of principal or interest. Windmill Lakes has been adversely affected by a competitive housing market in its South Florida area. As a result, at March 31, 1998 the borrower of the Windmill Lakes Additional Loan is in technical default on its Additional Loan for not making the full required base interest payments due on the Additional Loan. The Advisor is currently assessing the feasibility of extending debt service relief to the borrower until the market stabilizes. 3. MBS At March 31, 1998, the Trust's MBS portfolio has an amortized cost of approximately $49,337,139 and gross unrealized gains and losses of approximately $515,378 and $48,460. The MBS portfolio has maturities ranging from 2008 to 2023. -8- KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS, Continued 4. Changes in Shareholder's Equity A summary of changes in Shareholders' equity for the three months ended March 31, 1998 is as follows: Total Common Retained Unrealized Shareholders' Stock Earnings Gain(Loss) Equity Balance at December 31, 1997 $289,864,327 $ - $ 506,743 $290,371,070 Net income - 4,286,801 - 4,286,801 Dividends (1,454,299) (4,286,801) - (5,741,100) Decrease in unrealized gain on MBS - - (39,825) (39,825) Balance at March 31, 1998 $288,410,028 $ - $ 466,918 $288,876,946 5. Related Party Transactions During the three months ended March 31, 1998 and 1997, the Trust received $221,641 and $198,261, respectively, of interest on an Additional Loan with an affiliate of the Advisor. In addition, the Trust received $68,456 and $0, respectively, related to participation interest income for the three months ended March 31, 1998 and 1997. -9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Managements expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources At March 31, 1998 the Trust has significant liquidity consisting of cash and cash equivalents, of approximately $14.7 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 is quarterly dividends 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. The Advisor of the Trust periodically reviews the dividend rate to determine whether an adjustment to the dividend rate 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. The borrower on the St. Germain PIMI is pursuing a refinance of the property while financing options are favorable. The borrower has requested a waiver of the prohibition preventing a repayment of the loan prior to the end of the fifth loan year, which occurs in December 1998. This request is currently under review by the Advisor. If the Advisor approves the request, the Trust will receive its preferred return as well as its share in the increase in the value of the property, which will be determined with an appraisal. Most of the other properties in the Trust=s portfolio generate sufficient operating revenues to adequately maintain the property, service the debt and pay participating interest to the Trust. However, the operating performance -10- of Windmill Lakes in South Florida has continued to be adversely affected by the highly competitive housing market in Pembroke Pines, and the borrower is currently delinquent in his obligation on the Additional Loan. The borrower has been trying to sell the property but has been unable to secure a purchase offer that will cover the property=s outstanding liabilities. The Advisor is currently assessing the feasibility of extending debt service relief to the borrower until the market stabilizes. 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. 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 are guaranteed or insured by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the United States Department of Housing and Urban Development(HUD) and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. FNMA is a federally chartered private corporation that guarantees obligations originated under its programs. 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. However, obligations of FNMA are not backed by the U.S. Government. 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 higher risk debt instruments,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. -11- The Trust includes in cash and cash equivalents approximately $13 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization. Operations The following discussion relates to the operations of the Trust during the three ended months March 31, 1998 and 1997. The Trust s net income increased slightly during the first quarter of 1998 as compared to the first quarter of 1997 due to increases in participation interest and other interest income of approximately $203,000 and $68,000, respectively and a decline in expenses of approximately $91,000. This was offset by a decrease additional loan interest of approximately $99,000. The increase in participation income is due to the Trust recognizing the settlement related to The Estates of $232,000 that was received in 1998 and three of the PIMIs paying higher participation interest for the three months ended March 31, 1998 as compared to the same period in 1997. This was offset by lower participation interest from four other PIMIs for the three months ended March 31, 1998 as compared to the same period in 1997. The decrease in Additional Loan interest is due to the prepayment of the Willows Additional Loan during the third quarter of 1997 and no Additional Loan payment from the borrower of the Windmill Lakes PIMI. Other interest income also increased due to the Trust having higher short-term investment balances during the first quarter of 1988 when compared to the same period in 1997. The decrease in expenses is primarily due to lower general and administrative expenses for transfer agent costs of approximately $30,000 during the three months ended March 31, 1998 as compared to the same period in 1997. The decrease in base interest on PIMs and the increase in interest on MBS are primarily due to two transactions in 1997 involving the Willows Apartment PIMI and the Estates Apartment PIM. In each of these transactions the properties were sold and the Participating and Additional Loans were paid off. However, the buyer assumed the existing first mortgage and the Trust will continue to receive principal and interest on the portion of the financing but has now classified it as an MBS. 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 assets of the Trust thereby reducing the income generated by the Trust in the future. -12- 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: April 23, 1998 -14- EX-27 2
5 The schedule contains summary financial information extracted from the balance sheet and statement of income and is qualified in its entirety by reference to such financial statements. 0000872467 KRUPP GOVERNMENT INCOME TRUST II 3-MOS MAR-31-1998 MAR-31-1998 14,656,337 261,701,439 1,644,290 0 0 13,494,844 0 0 291,496,910 2,619,964 0 0 0 288,410,028 466,918 291,496,910 0 5,490,525 0 0 1,203,724 0 0 4,286,801 0 4,286,801 0 0 0 4,286,801 0 0 Includes Participating Insured Mortage Investments ("PIMs") (insured mortages of $145,175,884 and Additional Loans of $29,152,351), Participating Insured Mortgages ("PIMs") of $37,569,147 and Mortgage-backed Securities ("MBS") of $49,804,057. Includes prepaid acquisition fees and expenses of $16,483,642 net of accumulated amortization of $6,496,265 and prepaid participation servicing fees of $5,494,547 net of accumulated amortization of $1,987,080. Includes deferred income on Additional Loans of $2,586,142. Unrealized gain on MBS. Represents interest income on investments in mortgages and cash. Includes $525,668 of amortization of prepaid fees and expenses.
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