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 June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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
-5-
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
BALANCE SHEETS
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
<S> <C> <C>
Insured Mortgages $ 91,452,008 $ 108,470,247
Additional loans 13,358,208 19,209,108
Participating Insured Mortgages ("PIMs")
(Notes 2) 47,928,772 48,112,523
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 24,869,720 27,085,341
------------- -------------
Total mortgage investments 177,608,708 202,877,219
Cash and cash equivalents 37,138,095 9,749,804
Interest receivable and other assets 1,176,870 1,294,240
Prepaid acquisition fees and expenses, net
of accumulated amortization of $7,842,467
and $6,658,224, respectively 4,423,983 5,608,226
Prepaid participation servicing fees, net of
accumulated amortization of $2,293,547 and
$1,839,070, respectively 1,795,166 2,249,643
------------- -------------
Total assets $ 222,142,822 $ 221,779,132
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans
(Notes 2 and 5) $ 5,578,309 $ 7,871,606
Other liabilities 16,961 25,414
------------- -------------
Total liabilities 5,595,270 7,897,020
Shareholders' equity (Note 4):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 212,496,510 212,496,510
Retained earnings 2,729,725 -
Unrealized gain on MBS 1,321,317 1,385,602
------------- --------------
Total Shareholders= equity 216,547,552 213,882,112
------------- --------------
Total liabilities and Shareholders'
equity $ 222,142,822 $ 221,779,132
============= ==============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---------- ---------- ---------- -------
Revenues:
Interest income - PIMs
and PIMIs:
<S> <C> <C> <C> <C>
Base interest $ 2,955,766 $2,940,268 $ 6,011,682 $6,219,189
Additional Loan
Interest 2,754,049 15,625 2,862,316 648,745
Participation income 4,871,325 - 4,898,075 1,348,392
Interest income - MBS 498,604 574,190 1,018,248 1,100,421
Other interest income 257,217 320,120 385,637 590,514
----------- ---------- ---------- ----------
Total revenues 11,336,961 3,850,203 15,175,958 9,907,261
----------- ---------- ---------- ----------
Expenses:
Asset management fee
to an affiliate 359,209 381,699 730,797 764,685
Expense reimbursements
to affiliates (27,525) 95,646 68,121 204,642
Amortization of prepaid
expenses and fees 1,259,126 395,212 1,638,720 790,425
General and
administrative 141,447 101,182 224,049 229,256
----------- ---------- ----------- ----------
Total expenses 1,732,257 973,739 2,661,687 1,989,008
----------- ---------- ----------- ----------
Net income $ 9,604,704 $2,876,464 $12,514,271 $7,918,253
=========== ========== =========== ==========
Earning per Share $ .64 $ .20 $ .83 $ .53
=========== ========== =========== ==========
Weighted average Shares
outstanding 15,053,135 15,053,135
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
------------ --------
Operating activities:
<S> <C> <C>
Net income $12,514,271 $ 7,918,253
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of net premium - 980
Amortization of prepaid fees and expenses 1,638,720 790,425
Changes in assets and liabilities:
Decrease in interest receivable and other
assets 117,370 149,657
Decrease in other liabilities (8,453) (14,841)
---------- --------
Net cash provided by operating activities 14,261,908 8,844,474
---------- ---------
Investing activities:
PIM prepayment 16,752,295 5,630,985
Principal collections on PIMs 449,695 431,352
Collection of Additional Loan 5,850,900 1,540,000
Principal collections on MBS 2,151,336 1,514,874
Acquisition of insured mortgage - (3,366,000)
Decrease in deferred income on
Additional Loans (2,293,297) (79,090)
---------- ----------
Net cash provided by investing activities 22,910,929 5,672,121
---------- ----------
Financing activity:
Dividends (9,784,546) (9,784,548)
---------- ----------
Net increase in cash and cash equivalents 27,388,291 4,732,047
Cash and cash equivalents, beginning of period 9,749,804 19,053,931
----------- ----------
Cash and cash equivalents, end of period $37,138,095 $23,785,978
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
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. 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 of only normal
recurring accruals) necessary to present fairly the Trust's financial
position as of June 30, 1998, its results of operations for the three and
six months ended June 30, 1998 and 1997, and its cash flows for the six
months ended June 30, 1998 and 1997.
The results of operations for the three and six months ended June 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 June 30, 1998, the Trust=s PIMs and PIMIs have a fair value of
approximately $148,413,777 and gross unrealized gains and losses of
approximately $1,040,041 and $5,365,252 respectively. The PIMs and PIMIs
have maturities ranging from 2001 to 2034. At June 30, 1998, there was one
insured mortgage loan held in the Trust's portfolio that was delinquent in
its principal and interest payments. The borrower on the Lifestyles at
Boot Ranch PIMI defaulted on its May 1, 1998 debt service payment.
However, the Trust continues to receive its monthly principal and interest
pass-thru payments because those payments are insured by GNMA. All other
borrowers were current in their debt service obligations on the insured
mortgages held in the Trust's portfolio.
During June of 1998, the Trust received a prepayment of the Park Highlands
PIMI and Additional Loan with a remaining principal balance of $16,752,295
and $3,000,000 respectively. In addition, the Trust received Participation
income as follows: (i) a Preferred Return of $1,481,865, (ii)
Participating Appreciation interest of $1,206,719, (iii) a Prepayment
Premium of $479,476, (iv) Participating Income interest of $211,316 and
(v) Additional Loan interest payable through the date of sale of $57,945.
Also during June, the Trust received a prepayment of the Coconut Palm Club
Additional Loan of $2,850,900. The Trust received a preferred return of
$1,400,538 and Additional Loan interest payable through the date of sale
of $89,091. The Coconut Palm Club PIMI first mortgage of $15,851,211 was
received by the Trust on July 15, 1998.
Due to the prepayments of the Park Highlands and Coconut Palm Club
Additional Loans in June, the Trust also recognized additional loan
interest of $1,290,000 and $1,295,354 respectively, that had been
previously classified as deferred income on Additional Loans.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At June 30, 1998, the Trust=s MBS portfolio has an amortized cost of
approximately $23,548,403 and unrealized gains of $1,321,317. The MBS
portfolio has maturities ranging from 2008 to 2029.
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. FASB 130 had no material effect on the
Trust's financial position or results of operations.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for six months ended June 30,
1998 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $212,496,510 $ - $ 1,385,602 $213,882,112
Net income - 12,514,271 - 12,514,271
Dividends - (9,784,546) - (9,784,546)
Decrease in unrealized
gain on MBS - - (64,285) (64,285)
------------ ----------- ----------- -----------
Balance at June 30, 1998 $212,496,510 $ 2,729,725 $ 1,321,317 $216,547,552
============ =========== =========== ============
</TABLE>
5. Related Party Transactions
During the three months ended June 30, 1998 and 1997 the Trust received $0
and $22,710 of interest income on Additional Loans from affiliates of the
Advisor. During the six month ended June 30, 1998 and 1997, the Trust
received $86,609 and $100,194 of interest income on Additional Loans from
affiliates of the Advisor. In addition, for the six months ended June 30,
1998 and 1997, the Trust received $26,749 and $0 related to participation
interest income from an affiliate of the Advisor.
6. Subsequent Event
On August 6, 1998, the Advisor of the Trust declared a special dividend
of $2.86 per share to be paid during the third quarter of 1998 from the
prepayment proceeds of the Park Highlands and Coconut Palm Club PIMIs.
<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. Six of the Trust's seven
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 1998, Red Run has sufficient escrows to make the required
Additional Loan base interest payments if operations cannot support such
payments. In addition, the Trust received the scheduled semi-annual interest
payments on the Additional Loans related to Park Highlands and The Seasons. As a
result of the workouts negotiated on the Lifestlyes and Windward Lakes, interest
on the additional loans will only be paid if there is any surplus cash generated
from each of the property's operations. 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.
The borrower on the Mountain View PIMI has asked the Advisor to consider
some type of debt service relief. The Trust had entered into a short-term
workout agreement that had waived four (4) Base Interest payments on the
Additional Loan and had reduced the interest rate on the insured mortgage by
1/2%for an 18-month period, which ended in December 1996. The recent
strength of the Huntsville market and low interest rates have flooded the market
with both single-family homes and new apartment construction. Consequently,
Mountain View's occupancy and rental rate collections have fallen. The Advisor
is currently assessing the feasibility of extending debt service relief to the
borrower until the market stabilizes.
On June 3, 1998, the Trust received a prepayment of the Park Highlands
Apartments Additional Loan. The Trust received $3,000,000 to repay the
Additional Loan, $3,379,376 representing participation interest and $57,945 of
additional loan interest. On June 19, 1998, the Trust received $16,752,295 to
repay the outstanding first mortgage balance.
On June 12, 1998, the Trust received a prepayment of the Coconut Palm Club
PIMI. The Trust received $2,850,900 to repay the Additional Loan $1,400,538
representing participation interest and $89,091 of additional loan interest. On
July 15, 1998, the Trust received $15,851,211 to repay the outstanding first
mortgage balance.
On August 6, 1998, the Advisor of the Trust declared a special dividend of
$2.86 per share to be paid during the third quarter of 1998 from the prepayment
proceeds of the Park Highlands and Coconut Palm Club PIMIs.
The borrower on the Lifestyles PIMI defaulted on its May 1, 1998 debt
service payment on the insured first mortgage loan. The Trust had entered into a
workout agreement that had changed the structure of the Additional Loan payments
and had reduced the interest rate on the insured mortgage by 1% per annum for a
twenty-four month period that ended in December 1997. Due to continuing
competition from newer properties, Lifestyles has not been able to generate
sufficient operating revenues to maintain the property and service the first
mortgage debt. The Advisor expects to structure a long-term modification of the
first mortgage loan as well as the Additional Loan prior to year-end 1998.
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
FannieMae, the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government
National Mortgage Association (AGNMA@) 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.
Operations
The following discussion relates to the operations of the Trust during the
three and six months ended June 30, 1998 and 1997.
The Trusts net income for the three months ended June 30, 1998 increased as
compared to the three months ended June 30, 1997 by approximately $6,728,000.
This increase was due primarily to higher participation income of $4,871,000 and
additional loan interest income of $2,738,000 and lower expense reimbursements
of $123,000 and asset management fees of $22,000. This was offset by lower
interest income on MBS of $76,000, other interest income of $63,000 and higher
amortization expense of $864,000. The increases in participation income and
additional loan interest income are primarily related to the repayments of the
Park Highlands PIMI and the Coconut Palm Club Additional Loan. The Trust
received a combined $4,780,000 of participation interest, $147,000 of additional
loan interest and recognized $2,585,000 of interest that had been previously
received and recorded as deferred income on additional loans. The increase in
amortization expense is because the Trust, fully amortized the remaining
balances of prepaid fees and expenses associated with the Park Highlands PIMI.
Net income increased for the six months ended June 30, 1998, as compared to
the same period in 1997 by approximately $4,596,000. This increase was due
primarily to higher participation income of $3,550,000 and additional loan
interest income of $2,214,000 and lower expense reimbursements of $137,000 and
asset management fees of $34,000. This was offset by lower base interest of
$208,000, other interest income of $205,000 and interest income on MBS of
$82,000 and higher amortization expense of $848,000. Participation income and
additional loan interest recognized in 1998 is related to the above repayments
as compared to $1,246,000 of participation income and $540,000 of deferred
additional loan interest in 1997 related to the prepayment of the Timber Ridge
PIMI. The decrease in base interest is due to the borrower of the Timber Ridge
PIMI prepaying the first mortgage during the first quarter of 1997.
Other interest income also decreased due to the Trust having lower
short-term investment balances during the first half of 1998 when compared to
the corresponding period in 1997. During the six months ended June 1997, the
Trust invested, on a short-term basis the prepayment proceeds from the Canyon
Ridge and Timber Ridge prepayments while the Advisor sought alternative
investments in participating mortgages. When no suitable investment was found,
the Trust made a special dividend of $13.8 million during the third quarter of
1997. These decreases were slightly offset by lower expense reimbursements and
asset management fees as mentioned above. The Trust generally 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.
<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
<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: July 31, 1998
<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> Jun-30-1998
<PERIOD-END> Jun-30-1998
<CASH> 37,138,095
<SECURITIES> 177,608,708<F1>
<RECEIVABLES> 1,176,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,219,149<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 222,142,822
<CURRENT-LIABILITIES> 5,595,270<F3>
<BONDS> 0
0
0
<COMMON> 215,226,235
<OTHER-SE> 1,321,317<F4>
<TOTAL-LIABILITY-AND-EQUITY> 222,142,822
<SALES> 0
<TOTAL-REVENUES> 15,175,958<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,661,687<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,514,271
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,514,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,514,271
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Participating Insured Mortgage Investments (PIMIs)(insured
mortgages of $91,452,008 and Additional Loans of $13,358,208), Participating
Insured Mortgages(PIMs)of $47,928,772 and Mortgage-backed Securities (MBS) of
$24,869,720.
<F2> Includes prepaid acquisition fees and expenses of $12,266,450 net of
accumulated amortization of $7,842,467 and prepaid participation servicing fees
of $4,088,713 net of accumulated amortization of $2,293,547.
<F3>Includes deferred income on Additional Loans of $5,578,309.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $1,638,720 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
