-----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, EY8LPD+MEYjXdF+bspVaex6fDlgS8nu4PixhDQ4WlDoF3s014nptv6OCsEt6f/ii 1Puvotsj3m0bOOSv5Vn77Q== 0000872467-98-000014.txt : 19981113 0000872467-98-000014.hdr.sgml : 19981113 ACCESSION NUMBER: 0000872467-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98745271 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 September 30, 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 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, 1998 1997 Participating Insured Mortgages Investments ("PIMIs") Insured mortgages (Note 2) $133,461,199 $145,537,234 Additional loans (Note 2) 26,292,351 29,152,351 Participating Insured Mortgages ("PIMs")(Note 2) 38,411,591 37,645,082 Mortgage-Backed Securities and multi family insured mortgage loan ("MBS")(Note 3) 45,348,109 51,171,301 Total mortgage investments 243,513,250 263,505,968 Cash and cash equivalents 16,999,123 13,520,091 Prepaid acquisition fees and expenses, net of accumulated amortization of $7,822,766 and $6,099,180 8,660,876 10,384,462 Prepaid participation servicing fees, net of accumulated amortization of $2,550,732 and $1,858,497 2,943,815 3,636,050 Interest receivable and other assets 1,449,718 2,111,153 Total assets $273,566,782 $293,157,724 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans $ 2,603,811 $ 2,755,705 Other liabilities 33,820 30,949 Total liabilities 2,637,632 2,786,654 Shareholders' equity: (Note 4) Common Stock, no par value; 25,000,000 shares authorized and 18,371,477 shares outstanding 269,639,177 289,864,327 Unrealized gain on MBS 1,289,974 506,743 Total Shareholders' equity 270,929,151 290,371,070 Total liabilities and Shareholders' equity $273,566,782 $293,157,724
The accompanying notes are an integral part of the financial statements. KRUPP GOVERNMENT INCOME TRUST II STATEMENTS OF INCOME
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 Revenues: Interest income - PIMs and PIMIs: Base interest $3,088,808 $3,483,530 $ 9,432,180 $10,474,164 Additional loan interest 562,037 693,294 1,447,787 1,722,205 Participation interest 2,274,849 1,067,176 3,107,762 1,719,701 Interest income - MBS 762,244 676,796 2,541,786 2,112,536 Interest income - other 367,228 151,969 793,981 408,447 Total revenues 7,055,166 6,072,765 17,323,496 16,437,053 Expenses: Asset management fee to an affiliate 465,670 503,256 1,436,274 1,503,977 Expense reimbursements to affiliates 77,358 108,482 150,198 337,874 Amortization of prepaid expenses and fees 1,364,484 599,818 2,415,821 1,657,643 General and administrative 118,793 72,942 339,870 314,211 Total expenses 2,026,305 1,284,498 4,342,163 3,813,705 Net income 5,028,861 4,788,267 12,981,333 12,623,348 Net change in unrealized gain on MBS 776,376 420,505 783,231 209,627 Total comprehensive income $5,805,237 $5,208,772 $13,764,564 $12,832,975 Earnings per share $ .27 $ .26 $ .70 $ .69 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 Nine Months Ended September 30, 1998 1997 Operating activities: Net income $12,981,333 $ 12,623,348 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization 136,519 82,087 Amortization of prepaid expenses and fees 2,415,821 1,657,643 Changes in assets and liabilities: Decrease in interest receivable and other assets 661,435 415,689 Increase (decrease) in other liabilities 2,871 (4,049) Net cash provided by operating activities 16,197,979 14,774,718 Investing activities: Investment in PIMs (1,003,677) - Investment in Additional Loan - (465,000) Prepayment of Additional Loan 2,860,000 1,265,000 Principal collections on MBS 6,469,904 3,328,820 Principal collections on PIMs and Insured mortgages 12,313,203 1,344,342 Increase (decrease) in deferred income on Additional Loans (151,894) 674,919 Net cash provided by investing activities 20,487,536 6,148,081 Financing activity: Dividends (33,206,483) (17,223,299) Net increase in cash and cash equivalents 3,479,032 3,699,500 Cash and cash equivalents, beginning of period 13,520,091 9,214,592 Cash and cash equivalents, end of period $16,999,123 $ 12,914,092 Supplemental disclosure of non-cash investing activities: Reclassification of investment in a PIMI to an MBS $ - $ 3,515,288
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. 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 only normal recurring accruals) necessary to fairly present the Trust's financial position as of September 30, 1998, its results of operations for the three and nine months ended September 30, 1998 and 1997, and its cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 30, 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 September 30, 1998, the Trust's PIMs and PIMIs have a fair value of $192,001,903 and gross unrealized losses of $3,559,427, respectively. The PIMs and PIMIs have maturities ranging from 2008 to 2036. At September 30, 1998 there are no insured mortgage loans within the Trust's portfolio that are delinquent of principal or interest. On July 31, 1998 and on August 25, 1998, the Trust received the prepayments of the St. Germain Additional Loan of $2,860,000 and the related FNMA MBS with a remaining principal balance of $11,006,015, respectively. In addition, the Trust received Participation Interest as follows: (i) Additional Loan interest payable through the date of sale of $83,417, (ii) Contingent Interest payable through the date of sale of $89,975, (iii) Participating Appreciation Interest of $1,874,032. On October 9, 1998, the Trust received Participating Income Interest payable through the date of sale attributable to 1998 property operations of $94,258. On September 28, 1998, the Trust made a special dividend of $.87 per share to its Shareholders. During the second quarter of 1998, the Trust completed the funding of its commitment on the Fountains PIM. Windmill Lakes has been adversely affected by a competitive housing market in its South Florida area. As a result, since March 31, 1998 the borrower of the Windmill Lakes Additional Loan has been 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. Continued KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS, Continued 3. MBS At September 30, 1998, the Trust's MBS portfolio has an amortized cost of $44,058,135 and gross unrealized gains of $1,289,974. The MBS portfolio has maturities ranging from 2008 to 2023. In June 1997, Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' (FASB 130), was issued establishing standards for reporting and displaying comprehensive income and its components effective January 1, 1998. FASB 130 requires comprehensive income and its components, as recognized under accounting standards, to be displayed in a financial statement with the same prominence as other financial statements, if material. Accordingly, unrealized gains (losses) on the Trust's available-for sale securities have been included in other comprehensive income. 4. Changes in Shareholders' Equity A summary of changes in shareholders' equity for the nine months ended September 30, 1998 is as follows: Total Common Retained Unrealized Shareholders' Stock Earnings Gain Equity Balance at December 31, 1997 $289,864,327 $ - $ 506,743 $290,371,070 Net income - 12,981,333 - 12,981,333 Dividends (20,225,150) (12,981,333) - (33,206,483) Change in unrealized gain on MBS - - 783,231 783,231 Balance at September 30, 1998 $269,639,177 $ - $ 1,289,974 $270,929,151
5. Related Party Transactions During the three months ended September 30, 1998 and 1997 the Trust earned $221,641 and $221,641 respectively, of interest income on the Additional Loan from an affiliate of the Advisor. During the three months ended September 30, 1998 and 1997, the Trust received and deferred $0 and $547,357, respectively, of interest payments on the Additional Loan from an affiliate of the Advisor. During the nine months ended September 30, 1998 and 1997 the Trust earned $443,282 and $419,901, respectively, of interest income on the Additional Loan from an affiliate of the Advisor. During the nine months ended September 30, 1998 and 1997, the Trust received and deferred $0 and $603,828, respectively, of interest payments on the Additional Loan from an affiliate of the Advisor. In addition, the Trust received $170,652 and $83,360 from an affiliate related to Participating Interest Income for the three months ended September 30, 1998 and 1997. The Trust also received $239,107 and $83,360 from an affiliate related to Participating Interest Income for the nine months ended September 30, 1998 and 1997. 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 has conducted an assessment of the Trust's core internal and external computer information systems and has taken the further 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, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The Advisor completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the Advisor has generated operating efficiencies and believes its financial accounting operating systems are Year 2000 ready. The Trust incurred hardware costs as well as consulting and other expenses related to the infrastructure and facilities enhancements necessary to complete the upgrade and prepare for the Year 2000. There are no other systems or software that the Trust is using at the present time. The Advisor of the Trust is in the process of 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. No estimate can be made at this time as to the impact of the readiness of such third parties. Liquidity and Capital Resources At September 30, 1998 the Trust has significant liquidity consisting of cash and cash equivalents, of approximately $17 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 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. As a result of the St. Germain payoff the Trust made a special dividend of $.87 per share from the payoff proceeds. Consequently, the Trust's capital resources and its future cash flows will be lower. However, at this time the Advisor has determined that the Trust can maintain its current dividend rate of $1.25 per share per year. 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 Lakes at Vinings and Martins Landing PIMIs sold these properties during July 1998, and the purchaser assumed both the guaranteed first mortgage loans and the Additional Loans on both properties. The borrower on the Windsor Lake PIMI has approached the Trust with a request to either allow a prepayment of the PIMI at a discount or enter into a workout agreement that would provide debt service relief. There are significant repair and replacement issues with Windsor Lake that will have a long-term effect on the value of the property. The Advisor is currently assessing the borrower's request and expects to respond prior to year-end. Also the operating performance of two properties located in South Florida, Oasis at Springtree and Windmill Lakes, continue to be adversely affected by highly competitive housing markets. Low interest rates and available building sites have encouraged aggressive development of both single-family homes and new apartment product. The borrower on the Windmill Lakes PIMI is currently delinquent in his obligation on the Additional Loan. Although he is trying to sell the property, he 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 on Windmill Lakes until that market stabilizes. All 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. 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 Fannie Mae, 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. Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. However, obligations of Fannie Mae are not backed by the U.S. Government. 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 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. The Trust includes in cash and cash equivalents approximately $16.6 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 and nine months ended September 30, 1998 and 1997. The Trust's net income increased for the three and nine months ended September 30, 1998 as compared to the same periods in 1997. The increases were due to increases in interest income on MBS, participation interest and interest income on cash and cash equivalents and decreases in expense reimbursements and asset management fees. This was offset by decreases in base interest income from PIMs and PIMIs and additional loan interest and increases in amortization and general and administrative expenses. The increase in interest income on MBS is 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 this portion of the financing but the Trust has now classified it as an MBS. The increase in participation interest is due to the Trust receiving participation interest related to prepayment of the St. Germain PIMI and also the Trust recognizing the settlement related to The Estates that was received in 1998. Interest income on cash and cash equivalents also increased due to the Trust having higher short-term investment balances during the three and nine months ended September 30, 1998 when compared to the same period in 1997. The decrease in expense reimbursements when comparing 1998 to 1997 is due to the Trust having received a rebate for expense reimbursements related to 1997. The decrease in asset management fees when comparing 1998 to 1997 is a result of the Trust's asset base declining. The decrease in base interest on PIMs and PIMIs is due to two transactions in 1997 involving the Willows Apartment PIMI and the Estates Apartment PIM as mentioned above. 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 interest payment from the borrower of the Windmill Lakes PIMI. The increase in amortization expense is because the Trust fully amortized the remaining balance of the prepaid fees and expenses associated with the St. Germain PIMI. 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. 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, 1998 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 9-MOS Sep-30-1998 Sep-30-1998 16,999,123 243,513,520 1,449,718 0 0 11,604,691 0 0 273,566,782 2,637,632 0 0 0 269,639,177 1,289,974 273,566,782 0 17,323,496 0 0 4,342,163 0 0 12,981,333 0 12,981,333 0 0 0 12,981,333 0 0 Includes Participating Insured Mortgage Investments ("PIMIs") (insured mortgages of $133,461,199 and Additional Loans of $26,292,351(, Participating Insured Mortgages ("PIMs") of $38,411,591 and Mortgage-backed Securities ("MBS") of $45,348,109. Includes prepaid acquisition fees and expenses of $16,483,642 net of accumulated amortization of $7,822,766 and prepaid participation servicing fees of $5,494,547 net of accumulated amortization of $2,550,732. Includes deferred income on Additional Loans of $2,603,811. Unrealized gain on MBS. Represents interest income on investments in mortgages and cash. Includes $2,415,821 of amortization of prepaid fees and expenses.
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