-----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, C6ahRZu5dzcviRXlIZqR1gR4joFR7m2Phvx39V6t4YL3HB5Frwhm4Jv8bP6V4YU5 3Tyb8+utI/lE/Nx8mgQJlg== 0000872467-99-000010.txt : 19991117 0000872467-99-000010.hdr.sgml : 19991117 ACCESSION NUMBER: 0000872467-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755548 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, 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 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) 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, 1999 1998 Participating Insured Mortgage Investments ("PIMIs")(Note 2): Insured mortgages $ 132,106,140 $ 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) 38,081,008 38,331,257 Mortgage-Backed Securities and multi-family insured mortgage loan ("MBS")(Note 3) 33,877,390 41,834,199 Total mortgage investments 227,362,889 236,596,132 Cash and cash equivalents 21,221,328 18,010,578 Prepaid acquisition fees and expenses, net of accumulated amortization of $ 8,281,546 and $ 7,167,563 respectively 7,175,566 8,289,549 Prepaid participation servicing fees, net of accumulated amortization of $ 2,678,515 and $ 2,321,513 respectively 2,473,855 2,830,857 Interest receivable and other assets 1,335,994 1,682,882 Total assets $ 259,569,632 $ 267,409,998 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans (Note 5) $ 2,585,039 $ 2,719,343 Other liabilities 81,761 43,563 Total liabilities 2,666,800 2,762,906 Shareholders' equity (Note 4): Common stock, no par value; 25,000,000 Shares authorized; 18,371,477 Shares issued and outstanding 257,056,354 264,099,856 Accumulated comprehensive (loss) income (153,522) 547,236 Total Shareholders' equity 256,902,832 264,647,092 Total liabilities and Shareholders' equity $ 259,569,632 $ 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 For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 Revenues: Interest income - PIMs and PIMIs: Basic interest $ 2,995,857 $ 3,088,808 $ 9,009,739 $ 9,432,180 Additional loan interest 392,683 562,037 1,367,277 1,447,787 Participation income 250,834 2,274,849 505,316 3,107,762 Interest income - MBS 585,222 762,244 1,838,554 2,541,786 Interest income - other 260,192 367,228 726,678 793,981 Total revenues 4,484,788 7,055,166 13,447,564 17,323,496 Expenses: Asset management fee to an affiliate 436,460 465,670 1,308,359 1,436,274 Expense reimbursements to affiliates 79,161 77,358 197,745 150,198 Amortization of prepaid expenses and fees 490,329 1,364,484 1,470,985 2,415,821 General and administrative 80,975 118,793 290,681 339,870 Total expenses 1,086,925 2,026,305 3,267,770 4,342,163 Net income 3,397,863 5,028,861 10,179,794 12,981,333 Other comprehensive income: Net change in unrealized gain on MBS (136,479) 776,376 (700,758) 783,231 Total comprehensive income $ 3,261,384 $ 5,805,237 $ 9,479,036 $ 13,764,564 Earnings per share $ .18 $ .27 $ .55 $ .70 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, 1999 1998 Operating activities: Net income $ 10,179,794 $ 12,981,333 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization 151,675 136,519 Amortization of prepaid fees and expenses 1,470,985 2,415,821 Changes in assets and liabilities: Decrease in interest receivable and other assets 346,888 661,435 Increase in other liabilities 38,198 2,871 Net cash provided by operating activities 12,187,540 16,197,979 Investing activities: Investment in PIMs and Insured Mortgages - (1,003,677) Prepayment of Additional Loan - 2,860,000 Principal collections on MBS 7,104,376 6,469,904 Principal collections on PIMS and Insured mortgages 1,276,434 12,313,203 Decrease in deferred income on Additional Loans (134,304) (151,894) Net cash provided by investing activities 8,246,506 20,487,536 Financing activity: Dividends (17,223,296) (33,206,483) Net increase in cash and cash equivalents 3,210,750 3,479,032 Cash and cash equivalents, beginning of period 18,010,578 13,520,091 Cash and cash equivalents, end of period $ 21,221,328 $ 16,999,123
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. In the opinion of the Advisor, 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 September 30, 1999, the results of its operations for the three and nine months ended September 30, 1999 and 1998 and its cash flows for the nine months ended September 30, 1999 and 1998. The results of operations for the three and nine months ended September 30, 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 September 30, 1999, the Trust's PIMs and PIMIs had a fair value of $190,164,472 and gross unrealized gains and losses of $445,831, and $3,766,858 respectively. The PIMs and PIMIs have maturities ranging from 2008 to 2036. At September 30, 1999 the Trust's six participating insured mortgage loans were not delinquent of principal or interest. Windmill Lakes and Oasis have been adversely affected by a competitive housing market in the South Florida area. As a result, at September 30, 1999 their respective borrowers were in technical default for not making the full required base interest payments due on the Additional Loan. The Advisor is currently assessing its options related to these loans. Management believes that the impairment provision of $2,994,000 is adequate based on its analysis of property operations underlying the Additional Loans. 3. MBS At September 30, 1999, the Trust's MBS portfolio had an amortized cost of approximately $34,030,912 and gross unrealized gains and losses of approximately $139,367 and $292,889, respectively. The MBS portfolio has maturities ranging from 2008 to 2031. At September 30, 1999, the Trust's insured mortgage loan was not delinquent of principal and interest. 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 nine months ended September 30, 1999 is as follows: Accumulated Total Common Retained Comprehensive Shareholders' Stock Earnings Income (loss) Equity Balance at December 31, 1998 $ 264,099,856 $ - $ 547,236 $ 264,647,092 Net income - 10,179,794 - 10,179,794 Dividends (7,043,502) (10,179,794) - (17,223,296) Change in unrealized gain on MBS - - (700,758) (700,758) Balance at September 30, 1999 $ 257,056,354 $ - $ (153,522) $ 256,902,832
5. Related Party Transactions During the three and nine months ended September 30, 1999, and 1998, both years had Additional Loan interest income of $221,641 and $443,282, respectively, received from an affiliate of the Advisor. During the three and nine months ended September 30, 1999, participation interest income of $200,834 and $392,816, respectively, was received from an affiliate of the Advisor. During the three and nine months ended September 30, 1998, participation interest income of $170,652 and $239,107 was received from an affiliate of the Advisor. 6. Subsequent Event The Estates The Trust received a payoff from The Estates MBS on October 18, 1999 for $11,375,380. The Trust did not receive any participation income but did receive a prepayment premium of $1,023,784. The Trust will pay a special distribution of $.68 per Unit from the payoff proceeds in October. 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 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. Impact of the Year 2000 Issue The Advisor conducted an assessment of the Trust's core internal and external computer information systems and has taken the necessary steps to further 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 Advisor 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 significant internal systems or software that the Trust is using at the present time. The Advisor of the Trust surveyed the Trust's material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors and received assurances that such providers and vendors are to be Year 2000 ready. The Trust does not anticipate any problems with such providers and vendors that would materially impact its results of operations, liquidity or capital resources. Nevertheless the Advisor is developing contingency plans for all of its "mission-critical functions" to insure business continuity. 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. However, the Trust does not anticipate these would materially impact its results of operations, liquidity or capital resources. To date, the Trust has incurred $20,265 of costs associated with being Year 2000 ready. The Trust does not expect to incur any additional Year 2000 readiness costs. Liquidity and Capital Resources At September 30, 1999 the Trust had significant liquidity consisting of cash and cash equivalents, of approximately $21.2 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 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 should pay a special dividend and then adjust the dividend rate effective with the dividend to be made in February 2000. The Board of Trustees will evaluate this matter at their quarterly meeting in November. 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 on the MBS and insured mortgages, 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 principal and 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 participation income 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 currently assessing its options related to these loans. The Trust received a payoff of $12,399,164 from the Estates MBS consisting of a first mortgage of $11,375,380 and a prepayment premium of $1,023,784 on October 18, 1999. During October, 1999, the Partnership will pay a special distribution of $.68 per unit from the proceeds received from the Estates MBS payoff. 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 MBS and insured mortgages are guaranteed or insured by The FannieMae, the Federal Home Loan Mortgage Corporation (FHLMC) the Government National Mortgage Association (GNMA), and the 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. FannieMae 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 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. 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. The Trust's Additional Loans have similar risks as those associated with higher risk debt instruments, including: reliance on the owner's operating skills, 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 $21 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. Results of Operations The following discussion relates to the operations of the Trust during the three and nine months ended September 30, 1999 and 1998. The Trust's net income decreased by $2.8 million during the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998 due primarily to decreases in participation income, interest income on MBS, and basic interest income on PIMs and PIMIs, net of a decrease in amortization expense. Participation income was higher in 1998 as compared to 1999 due primarily to the receipt of participation income of $1,964,000 upon payoff of the St. Germain PIMI during the nine months ended September 30, 1998. Interest income on MBS decreased during 1999 as compared to 1998 due to significant principal collections reducing the MBS investment balance. Basic interest on PIMs and PIMIs decreased in 1999 as compared to 1998 due primarily to the St. Germain prepayment mentioned above. Amortization expense decreased in 1999 versus 1998 due to fully amortizing the prepaid fees and expenses associated with the St. Germain PIMI in 1998. Net income decreased by $1.7 million during the three months ended September 30, 1999 as compared to the corresponding period in 1998 due primarily to lower participation income, Additional Loan interest income, and interest income on MBS net of a decrease in amortization expense. The reason for the changes in participation income, interest income on MBS and amortization expense are the same as discussed in the previous paragraph. The decrease in Additional Loan interest income during the three months ended September 30, 1999, compared to 1998, is due to no receipt of income from Oasis and the prepayment of the St. Germain PIMI. The Trust funds a portion of its 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. 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: October 29, 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 9-MOS DEC-31-1999 SEP-30-1999 21,221,328 227,362,889 1,335,994 0 0 9,649,421 0 0 259,659,632 2,666,800 0 0 0 257,056,354 153,522 259,659,632 0 13,447,564 0 0 3,267,770 0 0 10,179,794 0 10,179,794 0 0 0 10,179,794 0 0 Includes Participating Insured Mortgage Investments ("PIMIs") (insured mortgages of $132,106,140 and Additional Loans of $23,298,351), Participating Insured Mortgages("PIMs") of $38,081,008 and Mortgage-backed Securities (AMBS@) of $33,877,390. Includes prepaid acquisition fees and expenses of $15,457,112 net of accumulated amortization of $8,281,546 and prepaid participation servicing fees of $5,152,370 net of accumulated amortization of $2,678,515. Includes deferred income on Additional Loans of $2,585,039. Unrealized loss on MBS. Represents interest income on investments in mortgages and cash. Includes $1,470,985 of amortization of prepaid fees and expenses.
-----END PRIVACY-ENHANCED MESSAGE-----