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 June 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 0-19244
Krupp Government Income Trust
Massachusetts 04-3089272
(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
<PAGE>
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.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
<CAPTION>
BALANCE SHEETS
ASSETS
June 30, December 31,
1997 1996
<S> <C> <C>
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
Insured Mortgages $108,732,575 $114,625,179
Additional loans 19,209,108 20,749,108
Participating Insured Mortgages ("PIMs")
(Notes 2) 48,310,164 48,479,897
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 28,426,416 26,754,326
Total mortgage investments 204,678,263 210,608,510
Cash and cash equivalents 23,785,978 19,053,931
Interest receivable and other assets 1,558,142 1,707,799
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,668,353
and $6,090,173, respectively 6,805,006 7,383,186
Prepaid participation servicing fees, net of
accumulated amortization of $1,822,922 and
$1,610,677, respectively 2,668,083 2,880,328
Total assets $239,495,472 $241,633,754
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 7,246,324 $ 7,325,414
Other liabilities 12,892 27,733
Total liabilities 7,259,216 7,353,147
Shareholders' equity (Note 4):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 231,148,960 233,015,255
Unrealized gain on MBS 1,087,296 1,265,352
Total Shareholders equity 232,236,256 234,280,607
Total liabilities and Shareholders'
equity $239,495,472 $241,633,754
The accompanying notes are an integral
part of the financial statements.
</TABLE>
KRUPP GOVERNMENT INCOME TRUST
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Revenues:
<S> <C> <C> <C> <C>
Interest income - PIMs
and PIMIs:
Base interest $ 2,940,268 $ 3,221,901 $ 6,219,189 $ 6,609,507
Additional Loan
Interest 15,625 - 648,745 -
Participation income - 146,256 1,348,392 146,256
Interest income - MBS 574,190 590,932 1,100,421 1,202,648
Other interest income 320,120 274,386 590,514 395,487
Total revenues 3,850,203 4,233,475 9,907,261 8,353,898
Expenses:
Asset management fee
to an affiliate 381,699 396,089 764,685 811,376
Expense reimbursements
to affiliates 95,646 83,879 204,642 191,625
Amortization of prepaid
expenses and fees 395,212 403,417 790,425 823,240
General and
administrative 101,182 85,421 229,256 185,386
Total expenses 973,739 968,806 1,989,008 2,011,627
Net income $ 2,876,464 $ 3,264,669 $ 7,918,253 $ 6,342,271
Earning per Share $ .20 $ .22 $ .53 $ .42
Weighted average Shares
outstanding 15,053,135 15,053,135
</TABLE>
<PAGE>
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
1997 1996
<S> <C> <C>
Operating activities:
Net income $ 7,918,253 $ 6,342,271
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of net premium 980 -
Amortization of prepaid fees and expenses 790,425 823,240
Changes in assets and liabilities:
Decrease in interest receivable and other
assets 149,657 212,208
Decrease in other liabilities (14,841) (7,080)
Net cash provided by operating activities 8,844,474 7,370,639
Investing activities:
PIM prepayment 5,630,985 8,862,450
Principal collections on PIMs 431,352 427,672
Collection of Additional Loan 1,540,000 -
Principal collections on MBS 1,514,874 2,342,724
Acquisition of insured mortgage (3,366,000) -
Increase decrease in deferred income on
Additional Loans (79,090) 728,992
Net cash provided by investing activities 5,672,121 12,361,838
Financing activity:
Dividends (9,784,548) (9,784,548)
Net increase in cash and cash equivalents 4,732,047 9,947,929
Cash and cash equivalents, beginning of period 19,053,931 8,914,295
Cash and cash equivalents, end of period $23,785,978 $18,862,224
</TABLE>
<PAGE>
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
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 (the "Trust"), the disclosures contained in
this report are adequate to make the information presented not
misleading.
The Trust accounts for all of its investments 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 an 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 of only
normal recurring accruals) necessary to present fairly the Trust's
financial position as of June 30, 1997, its results of operations for
the three and six months ended June 30, 1997 and 1996, and its cash
flows for the six months ended June 30, 1997 and 1996.
The results of operations for the three and six months ended June 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
At June 30, 1997, the Trust s PIMs and PIMIs have a fair value of
approximately $170,682,250 and gross unrealized gains and losses of
approximately $307,002 and $5,876,599, respectively. The PIMs and
PIMIs have maturities ranging from 2001 to 2034. At June 30, 1997
there are no loans within the Trust s portfolio that are delinquent of
principal or interest.
-8-
<PAGE>
On February 6, 1997, the Trust, with the approval of the independent
Trustees, agreed to a workout with the borrower of the Windward Lakes
Apartments PIMI, an affiliate of the Advisor of the Trust. The terms
are as follows: a) interest rate relief for 1997 of 2% per annum and
1% per annum for 1998 through 2000 on the insured mortgage; b) the
borrower, McNab KC-3 L.P.( McNab ), will put in $133,036 of new equity
into the property; c) the borrower will cap the annual management fee
paid to an affiliate to 3% of
revenues; d) the Trust s participation in current operations shall be
50% of Surplus Cash as determined under HUD guidelines; e) Base Interest on
the Additional Loan is payable from the Trust s share of Surplus Cash and
unpaid amounts accrue at 7.5% per annum; and f)the Trust s
participation in a sale or refinancing, after repayment of the first
mortgage and additional loans,interest rate relief, accrued Base Interest and
McNab s new equity,shall be 50% of any remaining proceeds up to an amount
which would result in the Trust having received a cumulative,
noncompounded preferred return of 10% on its investment in the first
mortgage and additional loans; any remaining proceeds shall be
distributed to McNab.
During the first quarter the Trust received proceeds from the
prepayment of The Timber Ridge Apartments PIMI as follows: $1,540,000
to payoff the Additional loan; $1,045,961 representing additional
interest; $5,630,985 to payoff the outstanding first mortgage principal
balance. During the third quarter, the Trust will make a special
dividend of $.92 per share to it s investors. This special distribution
will consist of the 1996 Canyon Ridge PIM prepayment and the 1997
Timber Ridge prepayment proceeds, net of the reinvestment of $3,400,000
face value insured multifamily mortgage
3. MBS
At June 30, 1997, the Trust s MBS portfolio has an amortized cost of
approximately $27,339,120 and unrealized gains and losses of
$1,092,332 and $5,036, respectively. The MBS portfolio has maturities
ranging from 2008 to 2029.
During the first quarter of 1997, the Trust acquired a $3,400,000 face
value insured multi-family mortgage for $3,366,000 having a coupon
rate of 7.625% per annum and a maturity of April 2032.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for six months ended June
30, 1997 is as follows:
<PAGE>
<TABLE>
Total
<CAPTION>
Common Retained Unrealized Shareholders'
Stock Earnings Gain Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $233,015,255 $ - $ 1,265,352 $234,280,607
Net income - 7,918,253 - 7,918,253
Dividends (1,866,295) (7,918,253) - (9,784,548)
Decrease in unrealized
gain on MBS - - (178,087) (178,087)
Balance at June 30, 1997 $231,148,960 $ - $ 1,087,265 $232,236,256
</TABLE>
<PAGE>
5. Related Party Transactions
During the three months ended June 30, 1997 and June 30, 1996 the Trust
received $22,710 and $0 of interest income on Additional Loans from
affiliates of the Advisor. During the six month ended June 30, 1997 and 1996,
the Trust received $100,194 and $150,413 of interest income on Additional
Loans from affiliates of the Advisor.
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.
Liquidity and Capital Resources
The most significant demand on the Trust's liquidity is dividends paid
to investors of approximately $4.9 million per quarter. The Trust
currently has an annual dividend rate of $1.30 per share, paid in
quarterly installments of $.325 per share. Funds for dividends come from
interest income received on PIMs, PIMIs, MBS, 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 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. Seven of the Trust's nine PIMIs funded the
construction of multi-family housing, which require time to achieve
stabilized operations following completion of construction. With this in
mind, the Trust required the borrowers to establish reserves and escrows
with Additional Loan proceeds to provide funds for the Additional Loan
base interest payments during the construction and lease-up periods. As
these reserves become depleted, full payment of the Additional Loan base
interest will depend primarily on whether the underlying property can
generate sufficient operating cash flow.
For 1997, Coconut Palm, Mountain View, Red Run and The Seasons have
sufficient escrows to make the required Additional Loan base interest
payments if operations cannot support such payments. Management is
closely monitoring the operating performances of the remaining properties.
<PAGE>
Overall, the Trust's ability to meet its objectives will depend primarily
on the operating performance of the properties underlying the PIMs and
PIMIs. Lifestyles Apartments operating performance has improved under
new management operating the property for the past 9 months. However,
stiff competition from new apartment complexes and affordable single-
family homes is still prevalent in the market and affects the property s
ability to achieve rental increases. Overall, operations are stabilizing,
but significant improvement remains a long-term goal. The Trust has
agreed to a modification of the terms of the Windward Lakes PIMIs
including interest rate relief on the first mortgage through the year
2000. In addition, reserves set aside to fund Windward Lakes Apartments
Additional Loan base interest payments are depleted and the property
operations may not generate sufficient cash flow to meet the Additional
Loan base interest payments under the workout terms.
During the first quarter of 1997 the Trust received a prepayment of The
Timber Ridge Apartments PIMI. On February 28,1997, the Trust received
$1,540,000 to payoff the Additional loan and $1,045,961 representing
additional interest. On March 6, 1997, the Trust received $5,630,985 to
payoff the outstanding first mortgage principal balance.
During the third quarter, the Trust will make a special dividend of
$.92 per share to it s investors. This special distribution will consist
of the 1996 Canyon Ridge PIM prepayment and the 1997 Timber Ridge
prepayment proceeds, net of the reinvestment of $3,400,000 face value
insured multifamily mortgage
For the first five years of the PIMs and PIMIs the borrowers are
prohibited from repaying. For the second five years, the borrowers can
repay the loans and pay the greater of a prepayment penalty or all
participation interest for PIMs, or by paying all amounts due under the
PIMIs and satisfying the required preferred return. The participation
features and Additional Loans are neither insured nor guaranteed and if
repayment of a PIM or PIMI results from foreclosure on the underlying
property or an insurance claim the Trust would not receive any
participation interest or any amounts due under the Additional Loan. The
Trust has the option to call PIMs and PIMIs by accelerating their maturity
if the loans are not repaid 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 mortgages are guaranteed or insured
by FNMA, 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.
FNMA 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 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
The following discussion relates to the operations of the Trust during
the three and six months ended June 30, 1997 and 1996 (dollars in
thousands, except per Share amounts):
The Trust s net income for the three months ended June 30, 1997 decreased
as compared to the three months ended June 30, 1996 by approximately by
$388,000.
This decrease was due primarily to lower base interest and participation
income of $282,000 and $146,000, respectively. The decrease in base
interest is a result of the prepayments of the Canyon Ridge PIM during the
second quarter of 1996 and the Timber Ridge PIMI during the first quarter
of 1997.
Net income increased for the six months ended June 30, 1997, as compared
to the same period in 1996 by approximately $1,576,000. This increase
resulted from higher participation income and additional loan interest
income of $1,202,000 and $649,000, respectively net of lower base interest
of $390,000. The increases in participation income and additional loan
interest income are primarily related to the Timber Ridge PIMI. The Trust
received $1,246,000 of participation interest and reclassed $540,000 of
interest previously received and recorded in deferred income to interest
income upon early repayment of the PIMI. In addition, the Trust also
received participation interest from the Lincoln Green PIM of $102,000.
Base interest decreased as a result of the repayment of the Timber Ridge
PIMI during the first quarter of 1997 and the repayment of the Canyon
Ridge PIM during the second quarter of 1996.
The Trust generally funds a portion of its dividends with MBS and
PIM/PIMI principal collections which reduces the invested assets
generating income for the Trust in the future. As the invested assets
decline so will base interest on PIMs and PIMIs, interest income on MBS
and other interest income.
-13-
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
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
-14-
<PAGE>
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
(Registrant)
BY:/s/ Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer of
Krupp Government Income Trust
DATE: August 5, 1997
-15-
<PAGE>
-16-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0000857264
<NAME> KRUPP GOVERNMENT INCOME TRUST
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 23,785,978
<SECURITIES> 204,678,263<F1>
<RECEIVABLES> 1,558,142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,473,089<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 239,495,472
<CURRENT-LIABILITIES> 7,259,216<F3>
<BONDS> 0
0
0
<COMMON> 231,148,460
<OTHER-SE> 1,087,296<F4>
<TOTAL-LIABILITY-AND-EQUITY> 239,495,472
<SALES> 0
<TOTAL-REVENUES> 9,907,261<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,989,008<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,918,253
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,918,253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,918,253
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMs") (insured mortgages
of $108,732,575 and Additional Loans of $19,209,108), Participating Insured
Mortgages ("PIMs") of $48,310,164 and Mortgage-Backed Securities ("MBS") of
$28,426,416.
<F2>Includes prepaid acquisition fees and expenses of $13,473,359 net of
accumulated amortization of $6,668,353 and prepaid participating servicing of
$4,491,005 net of accumulated amortization of $1,822,922.
<F3>Includes deferred income on Additional Loans of $7,246,324.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $790,425 of amortization for prepaid fees and expenses.
</FN>
</TABLE>
