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 September 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 offactors,
including those identified herein.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
<CAPTION>
BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
<S>
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
<S> <C> <C>
PIMs $108,602,747 $114,625,179
Additional Loans 19,209,108 20,749,108
Participating Insured Mortgages ("PIMs")(Note 2) 48,222,738 48,479,897
Mortgage-Backed Securities and insured mortgage
("MBS") (Note 3) 28,116,909 26,754,326
Total mortgage investments 204,151,502 210,608,510
Cash and cash equivalents 10,006,450 19,053,931
Interest receivable and other assets 1,321,794 1,707,799
Prepaid acquisition fees and expenses, net of
accumulated amortization of $7,576,043 and
$6,090,173, respectively 5,897,316 7,383,186
Prepaid participation servicing fees, net of
accumulated amortization of $2,135,239 and
$1,610,677, respectively 2,355,766 2,880,328
Total assets $223,732,828 $241,633,754
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans(Note 4) $ 7,692,023 $ 7,325,414
Other liabilities 18,172 27,733
Total liabilities 7,710,195 7,353,147
Shareholders' equity (Note 5):
Common stock, no par value; 17,510,000
shares authorized and 15,053,135 shares
issued and outstanding 214,580,907 233,015,255
Unrealized gain on MBS 1,441,726 1,265,352
Total Shareholders' equity 216,022,633 234,280,607
Total liabilities and Shareholders'
equity $223,732,828 $241,633,754
</TABLE>
-2-
<PAGE>
The accompanying notes are an integral
part of the financial statements
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
<CAPTION>
STATEMENTS OF INCOME
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S>
Revenues:
Interest income - PIMs and PIMIs:
<S> <C> <C> <C> <C>
Base interest (Note 2) $2,981,872 $3,141,595 $ 9,201,061 $ 9,751,102
Additional Loan Interest 123,173 - 771,918 -
Participation income 37,089 12,905 1,385,481 159,161
Interest income - MBS 558,426 562,753 1,658,847 1,765,401
Other interest income 250,855 243,792 841,369 639,279
Total revenues 3,951,415 3,961,045 13,858,676 12,314,943
Expenses:
Asset management fee to an affiliate 384,251 397,816 1,148,936 1,209,192
Expense reimbursements to affiliates 95,646 107,745 300,288 299,370
Amortization of prepaid expenses,
fees and organization costs 1,220,007 395,213 2,010,432 1,218,453
General and administrative 78,406 59,589 307,662 244,975
Total expenses 1,778,310 960,363 3,767,318 2,971,990
Net income $2,173,105 $3,000,682 $10,091,358 $ 9,342,953
Earnings per share $ .14 $ .20 $ .67 $ .62
Weighted average shares outstanding 15,053,135 15,053,135
</TABLE>
-4-
<PAGE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
1997 1996
<S>
Operating activities:
<S> <C> <C>
Net income $10,091,358 $ 9,342,953
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discounts and premiums 4,026 (3,718)
Amortization of prepaid expenses, fees and
organization costs 2,010,432 1,218,453
Changes in assets and liabilities:
Decrease in interest receivable and other assets 386,005 255,399
Increase (decrease) in other liabilities (9,561) 283
Net cash provided by operating
activities 12,482,260 10,813,370
Investing activities:
Principal collections on MBS 2,175,765 3,468,106
Principal collections on PIMs 648,606 641,118
Acquisition of insured mortgage (3,366,000) -
PIM prepayment 5,630,985 8,862,450
Collection of Additional Loan 1,540,000 -
Increase in deferred income on Additional
Loans 366,609 968,530
Net cash provided by investing
activities 6,995,965 13,940,204
Financing activity:
Dividends (28,525,706) (14,676,822)
Net increase (decrease) in cash and
cash equivalents (9,047,481) 10,076,752
Cash and cash equivalents, beginning of period 19,053,931 8,914,295
Cash and cash equivalents, end of period $10,006,450 $18,991,047
</TABLE>
-6-
<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 andExchange
Commission. However, in the opinion of Berkshire Mortgage
Advisors Limited Partnership (the "Advisor") of 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 StandardNo.
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 September 30, 1997, the results of its
operations for the three and nine months ended September 30, 1997 and
1996 and its cash flows for the nine months ended September 30, 1997
and 1996.
The results of operations for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results whichmay 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
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 ), contributed $133,036 of new
equity into the property; c) the borrower will cap the annual
management fee paid to an affiliate at 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
-8-
<PAGE>
Loan if payable from 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; $1,246,159 representing additional
interest; $5,630,985 to payoff the outstanding first mortgage
principal balance. During the third quarter, the Trust made a special
dividend of $.92 per share to it s investors. This special
distribtuion consisted of the 1996 Canyon Ridge PIM prepayment and the
1997 Timber Ridge prepayment proceeds, net of the reinvestment of
$3,400,000 in a face value insured multifamily mortgage.
3. MBS
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.
At September 30, 1997, the Trust s MBS portfolio has an amortized cost
of approximately $26,675,183 and unrealized gains of $1,441,726. The
MBS portfolio has maturities ranging from 2008 to 2029.
4. Related Party Transactions
During the three and nine months ended September 30, 1997, the Trust
earned $334,085 and $356,794, respectively, of interest on Additional
Loans and Shared Interest Income from affiliates of the Advisor as
compared to $57,739 and $208,152 during the three and nine months
ended September 30, 1996, respectively.
5. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for the nine months ended
September 30, 1997 is as follows:
<TABLE>
Total
<CAPTION>
Common Retained Unrealized Shareholders'
Stock Earnings Gain Equity
<S>
Balance at December 31,
<S> <C> <C> <C> <C>
1996 $233,015,255 $ - $ 1,265,352 $234,280,607
Net income - 10,091,358 - 10,091,358
Dividends (18,434,348) (10,091,358) - (28,525,706)
Change in unrealized
gain on MBS - - 176,374 176,374
Balance at September 30,
1997 $214,580,907 $ - $ 1,441,726 $216,022,633
</TABLE>
<PAGE>
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.
Overall, the Trust s ability to meet its objectives will depend primarily
on the operating performance of the properties underlying the PIMs and
PIMIs. During 1997, three Florida properties faced stiff competition from
new product entering the market. Two properties, Lifestyles and Windward
Lakes, are operating with assistance of debt service relief from the
Trust. A third, Coconut Palm Club, still has deficit reserves available
to cover operating shortfalls. Lifestyles operating performance has
improved under the new management team that took over property operations
during the third quarter of 1996 when the Trust agreed to provide debt
service relief. Although occupancy has stabilized this year in the low
90% range, concessions offered to attract residents to newly built
apartments limits management s ability to implement rental rate increases.
In addition to the Trust s debt service relief, property ownership also
has contributed additional funds to cover shortfalls as it had agreed to
do under the terms of the workout. Debt service relief is scheduled to
expire at the end of 1997, but the Trust expects to extend the workout for
another year while the market stabilizes. Both Windward Lakes and Coconut
Palm Club have experienced an increase in vacancy during the third quarter
to the 11% range as the Broward County Florida market has become more
saturated with newly built apartment properties.
During the first quarter of 1997 the Trust received a prepayment of The
Timber Ridge Apartments PIMI. The Trust received $1,540,000 to payoff the
Additional Loan and $1,246,159 representing additional interest and
$5,630,985 to payoff the outstanding first mortgage principal balance.
During the third quarter, the Trust made a special dividend of $.92 per
share to it s investors. This special distribution consisted 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 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 mortgages are guaranteed or insured by the
Federal National Mortgage Association ("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
<PAGE>
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 owners
operating skills, ability to maintain occupancy levels, control operating
expenses, ability to 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 nine months ended September 30, 1997 and 1996.
The Trust s net income decreased for the three months ended September 30,
1997 as compared to the same period in 1996 by $827,577 primarily due to
a decrease in base interest of $159,723 and increase in amortization
expense of $824,794. This was offset by an increase in additional loan
interest of $123,173 due to the Trust receiving and recognizing as
interest income additional loan interest payments from The Seasons. The
decrease in base interest is primarily due to the Timber Ridge Apartments
prepayment and the interest rate reduction to the Windward Lakes
Apartments PIMI. The increase in amortization expense is due to the
Trust fully amortizing the prepaid expenses and fees related to the
Canyon Ridge and Timber Ridge Apartments prepayments.
The Trust s net income increased for the nine months ended September 30,
1997, as compared to the same period in 1996 by $748,405. This increase
resulted from higher participation income, additional loan interest
income and other interest income of $1,226,320, $771,918 and $202,090,
respectively, net of lower base interest and interest income on MBS of
$550,041 and $106,554, respectively and an increase in amortization
expense as mentioned above of $791,979. 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 is receiving and recognizing as
interest income the additional loan interest payments from The Seasons.
The Trust also received participation interest from the Lincoln Green
PIM, The Seasons PIMI and the Riverview PIM of $102,000, $32,622 and
$4,466, respectively. 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
and the interest rate reduction given to Windward Lakes Apartments.
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.
-14-
<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
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: October 28, 1997
-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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,006,450
<SECURITIES> 204,151,502<F1>
<RECEIVABLES> 1,321,794
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,253,082<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 223,732,828
<CURRENT-LIABILITIES> 7,710,195<F3>
<BONDS> 0
0
0
<COMMON> 214,580,907
<OTHER-SE> 1,441,726<F4>
<TOTAL-LIABILITY-AND-EQUITY> 223,732,828
<SALES> 0
<TOTAL-REVENUES> 13,858,676<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,767,318<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,091,358
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,091,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,091,358
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $108,602,747 and Additional Loans of $19,209,108), Participating
Insured Mortgages ("PIMs") of $48,222,738 and Mortgage-backed Securities
("MBS") of $28,116,909.
<F2>Includes prepaid acquisition fees and expenses of $13,473,359 net of
accumulated amortization of $7,576,043 and prepaid participation servicing fees
of $4,491,005 net of accumulated amortization of $2,135,239.
<F3>Includes deferred income on Additional Loans $7,692,023.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $2,010,432 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
