-----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, TCUyJGCH2bNSCaywEU+2Yw01Xul468ZV2AD6tXYRA7Kp4OzmuC1NiZ1DhLmILENk nFq9Z8qHkcw5k6BN8wSnnw== 0000872467-99-000006.txt : 19990517 0000872467-99-000006.hdr.sgml : 19990517 ACCESSION NUMBER: 0000872467-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623707 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 KRUPP GOVERNMENT INCOME TRUST II 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 March 31, 1999 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.) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (Zip Code) (617) 523-0066 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 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, 1999 1998 Participating Insured Mortgage Investments ("PIMIs")(Note 2): Insured mortgages $132,796,944 $133,132,325 Additional loans, net of impairment provision of $2,994,000 23,298,351 23,298,351 Participating Insured Mortgages ("PIMs") (Note 2) 38,249,402 38,331,257 Mortgage-Backed Securities and insured mortgage loans ("MBS") (Note 3) 38,465,039 41,834,199 Total mortgage investments 232,809,736 236,596,132 Cash and cash equivalents 20,335,060 18,010,578 Prepaid acquisition fees and expenses, net of accumulated amortization of $7,538,891 and $7,167,563, respectively 7,918,221 8,289,549 Prepaid participation servicing fees, net of accumulated amortization of $2,440,513 and $2,321,513, respectively 2,711,857 2,830,857 Interest receivable and other assets 1,296,793 1,682,882 Total assets $ 265,071,667 $267,409,998 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans (Note 5) $ 2,781,780 $ 2,719,343 Other liabilities 38,958 43,563 Total liabilities 2,820,738 2,762,906 Shareholders' equity (Note 4): Common stock, no par value; 25,000,000 Shares authorized; 18,371,477 Shares issued and outstanding 261,739,798 264,099,856 Accumulated comprehensive income 511,131 547,236 Total Shareholders' equity 262,250,929 264,647,092 Total liabilities and Shareholders' equity $265,071,667 $267,409,998
The accompanying notes are an integral part of the financial statements. KRUPP GOVERNMENT INCOME TRUST II STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 1998 Revenue: Interest income - PIMs and PIMIs: Basic interest $ 3,010,589 $3,136,987 Additional loan interest 528,028 511,987 Participation income (Note 5) - 694,354 Interest income - MBS 642,107 958,292 Interest income - other 229,496 188,905 Total revenue 4,410,220 5,490,525 Expenses: Asset management fee to an affiliate 436,223 484,951 Expense reimbursements to affiliates 39,423 108,483 Amortization of prepaid fees and expenses 490,328 525,668 General and administrative 63,205 84,622 Total expenses 1,029,179 1,203,724 Net income $ 3,381,041 $4,286,801 Basic earnings per Share $ .18 $ .23 Weighted average Shares outstanding 18,371,477 18,371,477
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, 1999 1998 Operating activities: Net income $ 3,381,041 $ 4,286,801 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization 62,968 27,370 Amortization of prepaid fees and expenses 490,328 525,668 Changes in assets and liabilities: Decrease in interest receivable and other assets 386,089 466,863 Increase (decrease) in other liabilities (4,605) 2,873 Net cash provided by operating activities 4,315,821 5,309,575 Investing activities: Principal collections on MBS 3,270,087 1,300,049 Principal collections on PIMs and insured mortgages 417,236 437,285 Increase in deferred income on Additional Loans 62,437 (169,563) Net cash provided by investing activities 3,749,760 1,567,771 Financing activity: Dividends (5,741,099) (5,741,100) Net increase in cash and cash equivalents 2,324,482 1,136,246 Cash and cash equivalents, beginning of period 18,010,578 13,520,091 Cash and cash equivalents, end of period $20,335,060 $14,656,337
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 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, 1998 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, 1999 and the results of its operations and its cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 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, 1999, the Trust=s PIMs and PIMIs have a fair value of approximately $196,989,000 and gross unrealized gains of approximately $2,644,000. The PIMs and PIMIs have maturities ranging from 2008 to 2036. At March 31, 1999 there are no insured mortgage loans within the Trust=s portfolio that are delinquent of principal or interest. Windmill Lakes and Oasis have been adversely affected by a competitive housing market in their South Florida area. As a result, at March 31, 1999 their respective borrowers are in technical default for not making the full required base interest payments due on their respective Additional Loan. The Advisor is currently monitoring these properties and assessing the feasibility of extending debt service relief to these borrowers until the market stabilizes. 3. MBS At March 31, 1999, the Trust's MBS portfolio has an amortized cost of $37,953,908 and gross unrealized gains and losses of approximately $541,914 and $30,783, respectively. The MBS portfolio has maturities ranging from 2008 to 2023. Continued 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, 1999 is as follows:
Accumulated Common Retained Comprehensive Shareholders' Stock Earnings Income Equity Balance at December 31, 1998 $264,099,856 $ - $ 547,236 $264,647,092 Net income - 3,381,041 - 3,381,041 Dividends (2,360,058) (3,381,041) (5,741,099) Change in unrealized gain on MBS - - (36,105) (36,105) Balance at March 31, 1999 $261,739,798 $ - $ 511,131 $262,250,929
5. Related Party Transactions During the three months ended March 31, 1999 and 1998, the Trust earned $221,641 and $221,641, respectively, of interest on an Additional Loan with an affiliate of the Advisor. In addition, the Trust received $68,456 of participation interest income for the three months ended March 31, 1998. 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 may differ materially from those anticipated by such forward-looking statements. The Advisor of the Trust conducted an assessment of the Trust's core internal and external computer information systems and has taken the necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. In this regard, the Advisor of the Trust, along with certain affiliates, upgraded the computer hardware and software during 1997 and 1998. As a result, the Advisor has generated operating efficiencies and believes the financial accounting operating systems are Year 2000 ready. The Advisor of the Trust is evaluating the potential adverse impact that could result from the failure of material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors to be Year 2000 ready. The Trust is surveying these third party providers and assessing their Year 2000 readiness. To date, the Trust is not aware of any problems that would materially impact its results of operations, liquidity or capital resources. However, the Trust has not yet obtained all written assurances that these providers would be Year 2000 ready. The Trust currently does not have a contingency plan in the event of a particular provider or system not being Year 2000 ready. Such plan will be developed if it becomes clear that a provider is not going to achieve its scheduled readiness objectives by June 30, 1999. The inability of one of these providers to complete its Year 2000 resolution process could impact the Trust. In addition, the Trust is also subject to external forces that might generally affect industry and commerce, such as utility and transportation company Year 2000 readiness failures and related service interruptions. No estimate can be made at this time as to the impact of the readiness of such third parties. Liquidity and Capital Resources At March 31, 1999 the Trust has significant liquidity consisting of cash and cash equivalents, of approximately $20.3 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 the quarterly dividends paid to investors of approximately $5.7 million. The Trust currently has an annual dividend rate of $1.25 per share, paid in quarterly installments of $.3125 per share. Funds for the dividends paid by the Trust 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 the 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 will 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 adjust the dividend rate or distribute such funds through a special distribution. The Trust's investments in PIMs and PIMIs, in addition to providing guaranteed or insured monthly principal and interest payments, may provide the Trust with additional income through participation in the cash generated by the operations of the underlying properties and a portion of the appreciation realized upon the sale or refinancing of the underlying properties. The Trust's participation interests and the interest payments on the Additional Loan portion of the PIMIs are neither insured nor guaranteed and will depend primarily on the successful operation of the underlying properties. Most of the properties underlying the Trust=s PIMs and PIMIs generate sufficient operating revenues to adequately maintain the property, service the debt and pay participating interest to the Trust. However, the operating performance of Windmill Lakes and Oasis at Springtree in South Florida have continued to be adversely affected by the highly competitive housing market, and the respective borrowers are currently delinquent on their obligations on their Additional Loans. The Advisor is monitoring these properties and currently assessing the feasibility of extending debt service relief to these borrowers until the market stabilizes. For the first five years of the PIMs and PIMIs the borrowers are generally 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 Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC) or the United States Department of Housing and Urban Development (HUD) and the certainty of 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. Fannie Mae 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 Fannie Mae 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 higher risk debt instruments, including: reliance on the owner's ability to maintain occupancy levels, control operating expenses, maintain the property 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. The Trust includes in cash and cash equivalents approximately $20 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 Trust's net income decreased $906,000 ($.05 per Share) during the first quarter of 1999 as compared to the first quarter of 1998 due primarily to lower participation income, interest income on MBS and basic interest on PIMs and PIMIs, which was partially offset by a $175,000 decrease in Trust expenses. During the first quarter of 1999 the Trust did not receive any participation income, but in the first quarter of 1998 the Trust received $694,000 of participation income consisting of $232,000 from a participation income settlement from the 1997 sale of the property underlying The Estates PIM, $265,000 of participation income from the St. Germain PIMI and participation income from four other PIMIs totaling $197,000. Interest income on MBS decreased $316,000 in 1999 as compared to 1998 due to significant principal collections reducing the MBS investment balance. Basic interest income on PIMs and PIMIs decreased during the first quarter of 1999 as compared to 1998 due primarily to the prepayment of the St. Germain PIMI in the third quarter of 1998. The decrease in Trust expenses represents a $69,000 decrease in expense reimbursements to affiliates due in part to $40,000 rebate related to 1998 expense reimbursements; a $49,000 decrease in asset management fees resulting from principal collections, including the St. Germain prepayment, reducing the Trust's mortgage investments; and a $35,000 decrease in amortization expense resulting from fully amortizing the remaining prepaid fees and expenses associated with the St. Germain PIMI in 1998. As principal collections reduce the Trust's investments in MBS, PIMs and insured mortgages, interest income on MBS and basic 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. Additionally, asset management fees will decrease as the Trust's investments in MBS, PIMs and insured mortgages continue to decline as a result of principal collections. 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 30, 1999 EX-27 2 FDS --
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 Dec-31-1999 Jan-1-1999 Mar-31-1999 20,335,060 232,809,736 1,296,793 0 0 10,630,078 0 0 265,071,667 2,820,738 0 0 0 261,739,798 511,131 265,071,667 0 4,410,220 0 0 1,029,179 0 0 3,381,041 0 3,381,041 0 0 0 3,381,041 .18 0 Includes Participating Insured Mortgage Investments ("PIMIs") (insured mortgages of $132,796,944 and Additional Loans of $23,298,351) Participating Insured Mortgages ("PIMs") of $38,249,402 and Mortgage-backed Securities ("MBS") of $38,465,039. Includes prepaid acquisition fees and expenses of $15,457,112 net of accumulated amortization of $7,538,891 and prepaid participation servicing fees of $5,152,370 net of accumulated amortization of $2,440,513. Includes deferred income on Additional Loans of $2,781,780. Unrealized gain on MBS. Represents interest income on investments in mortgages and cash. Includes $490,328 of amortization of prepaid fees and expenses.
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