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 THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000
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 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
<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>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
Participating Insured Mortgage Investments
("PIMIs") (Note 2)
<S> <C> <C>
Insured Mortgages $ 59,849,372 $ 60,129,492
Additional Loans, net of impairment provision of $2,162,618 8,350,990 8,350,990
Participating Insured Mortgages ("PIMs") (Note 2) 47,005,385 47,331,673
Mortgage-Backed Securities and insured
mortgage loan ("MBS") (Note 3) 16,609,010 17,495,423
Total mortgage investments 131,814,757 133,307,578
Cash and cash equivalents 5,411,061 4,627,499
Interest receivable and other assets 595,686 973,491
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,653,725
and $6,089,755, respectively 1,679,736 2,243,706
Prepaid participation servicing fees, net of
accumulated amortization of $2,042,766 and
$1,834,434, respectively 734,983 943,315
Total assets $ 140,236,223 $ 142,095,589
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans $ 3,776,921 $ 3,918,021
Other liabilities 18,769 25,025
Total liabilities 3,795,690 3,943,046
Shareholders' equity (Note 4)
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 136,222,461 137,921,227
Accumulated comprehensive income 218,072 231,316
Total Shareholders' equity 136,440,533 138,152,543
Total liabilities and Shareholders' equity $ 140,236,223 $ 142,095,589
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
Revenues:
Interest income - PIMs
and PIMIs:
<S> <C> <C> <C> <C>
Basic interest $ 2,022,988 $ 2,127,439 $ 6,067,815 $ 6,761,546
Additional Loan interest 141,088 2,128,724 423,589 2,316,389
Participation interest 111,787 2,193,485 257,517 2,268,505
Interest income - MBS 342,105 371,727 1,041,779 1,172,022
Interest income - cash and
cash equivalents 79,316 178,998 224,355 384,162
Total revenues 2,697,284 7,000,373 8,015,055 12,902,624
Expenses:
Asset management fee
to an affiliate 252,854 267,621 755,747 847,908
Expense reimbursements
to affiliates 66,906 67,479 189,653 153,173
Amortization of prepaid
fees and expenses 257,434 793,618 772,302 1,385,349
General and administrative 134,083 71,201 319,019 281,055
Total expenses 711,277 1,199,919 2,036,721 2,667,485
Net income 1,986,007 5,800,454 5,978,334 10,235,139
Other comprehensive income:
Net change in unrealized
loss on MBS 29,573 (85,354) (13,244) (368,751)
Total comprehensive income $ 2,015,580 $ 5,715,100$ 5,965,090 $ 9,866,388
Basic earnings per Share $ .13 $ .39 $ .40 $ .68
Weighted average Shares
outstanding 15,053,135 15,053,135
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
2000 1999
Operating activities:
<S> <C> <C>
Net income $ 5,978,334 $ 10,235,139
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of (discounts) and premiums (2,469) 2,933
Amortization of prepaid fees and expenses 772,302 1,385,349
Changes in assets and liabilities:
Decrease in interest receivable and other assets 377,805 189,186
Decrease in deferred income on Additional Loans (141,100) (1,748,219)
(Decrease) increase in other liabilities (6,256) 41,520
Net cash provided by operating activities 6,978,616 10,105,908
Investing activities:
Principal collections on MBS 875,638 3,425,917
Principal collections on PIMs and Insured Mortgages 606,408 606,812
PIM prepayment - 14,861,957
Collections on Additional Loans - 2,844,600
Net cash provided by investing activities 1,482,046 21,739,286
Financing activity:
Dividends (7,677,100) (34,245,895)
Net Increase (decrease) in cash and cash equivalents 783,562 (2,400,701)
Cash and cash equivalents, beginning of period 4,627,499 9,004,397
Cash and cash equivalents, end of period $ 5,411,061 $ 6,603,696
Non Cash activities:
Decrease in Fair Value of MBS $ (13,244) $ (368,751)
</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, 1999 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, 2000, and the results of operations for the three and nine months
ended September 30, 2000 and 1999, and its cash flows for the nine months ended
September 30, 2000 and 1999.
The results of operations for the three and nine months ended September 30, 2000
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, 2000, the Trust's PIMs and PIMIs had a fair value of
$113,807,421 and gross unrealized gains and losses of $343,478 and $1,741,804
respectively. The PIMs and PIMIs have maturities ranging from 2002 to 2034. At
September 30, 2000, there are no insured mortgage loans within the Trust's
portfolio that are delinquent of principal or interest.
The Advisor believes that the impairment provision of $2,162,618 is adequate
based on its analysis of property operations underlying the Additional Loans.
3. MBS
At September 30, 2000, the Trust's MBS portfolio had an amortized cost of
$11,518,523 and unrealized gains and losses of $229,818 and $11,746,
respectively. At September 30, 2000, the Trust's insured mortgage loan has an
amortized cost of $4,872,415. The MBS portfolio including the insured mortgage
has maturities ranging from 2008 to 2035.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for the nine months ended
September 30, 2000 is as follows:
Total Accumulated
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ 137,921,227 $ - $ 231,316 $ 138,152,543
Net income - 5,978,334 - 5,978,334
Dividends (1,698,766 (5,978,334) - (7,677,100)
Change in unrealized
loss on MBS - - (13,244) (13,244)
Balance at September 30, 2000 $ 136,222,461 $ - $ 218,072 $ 136,440,533
</TABLE>
5. Related Party Transactions
The Trust received $86,609 and $106,262 of Additional Loan Interest during
the three months ended September 30, 2000 and 1999, respectively, from
affiliates of the Advisor. The Trust also received participation interest
of $105,743 and $78,479 from an affiliate of the Advisor during the three
months ended September 30, 2000 and 1999, respectively.
The Trust received $173,544 and $225,156 of Additional Loan Interest during
the nine months ended September 30, 2000 and 1999, respectively, from
affiliates of the Advisor. The Trust also received participation interest
of $174,505 and $153,499 from an affiliate of the Advisor during the nine
months ended September 30, 2000 and 1999, respectively.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At September 30, 2000 the Trust had liquidity consisting of cash and cash
equivalents, of approximately $5.4 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 $2.6 million, and special
distributions. 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 Advisor periodically reviews the dividend rate to determine whether an
adjustment is necessary based on projected future cash flows. The current
dividend rate is $.17 per Share per quarter. 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 PIMIs funded the construction or significant rehabilitation of
multifamily housing, which requires time to achieve stabilized operations
following the completion of the work. With this in mind, the Trust required
those borrowers to escrow a portion of the Additional Loan proceeds in
reserves so funds would be available for the PIMI Additional Loan payments
during the construction and lease-up periods. As these reserves become
depleted, full payment of the Additional Loan interest becomes primarily
dependent on whether the underlying property generates sufficient operating
cash flow to make such payments.
In addition to providing guaranteed or insured monthly principal and
interest payments, the Trust's investments in PIMs and PIMIs also may
provide additional income through the interest on the Additional Loan
portion of the PIMIs as well as participation income based on operating
cash flow and an increase in the value realized upon the sale or refinance
of the underlying properties. However, these payments are neither
guaranteed nor insured and depend upon the successful operations of the
underlying properties.
The Trust received the second installment of Additional Loan interest from
two of its PIMI investments, Red Run and The Seasons during the third
quarter of 2000. The Trust's three other PIMI investments, Lifestyles,
Mountain View and Windward Lakes operate under workout agreements with the
Trust that require Additional Loan interest payments only if Surplus Cash,
as defined by HUD, is generated through property operations. None of these
three properties generated Surplus Cash for the year ended December 31,
1999 or the six months ended June 30, 2000; consequently, the Trust did not
receive any Additional Loan interest.
The Trust received participation interest from three of its investments
during the nine months ended September 30, 2000. Waterford Townhomes, one
of the Trust's PIM investments, paid $42,731 of participation interest
based on 1999 operating results. Red Run, one of the Trust's PIMI
investments, paid $39,673 of participation interest; $33,630 based on 1999
operating results and $6,043 based on the first half of 2000 operating
results. The Trust also received $174,505 of participation interest from
The Seasons; $68,762 based on the second half of 1999 operating results and
$105,743 based on the first half of 2000. The Trust expects to collect
participation interest based on successful 1999 operating results from the
Lincoln Green PIM investment later during 2000. Three other properties,
Rivergreens I, Mill Pond I and Riverview, are occupied in the low 90% range
and generate sufficient revenue to meet all cash requirements for
operations and maintenance, but do not generate Surplus Cash under HUD's
definition for payment of participation interest to the Trust.
As mentioned above, three properties operate under workout agreements with
the Trust. Windward Lakes' operating results deteriorated during 1995 and
1996, and in early 1997 the independent Trustees approved a workout with
the borrower of the Windward Lakes PIMI, an affiliate of the Advisor of the
Trust. In the workout, the Trust agreed to reduce the effective basic
interest rate on the insured first mortgage by 2% per annum for 1997 and 1%
per annum for 1998, 1999 and 2000. The borrower made an equity contribution
of $133,036 to the property and agreed to cap the annual management fee
paid to an affiliate at 3% of revenues. The Trust's participation in
current operations is 50% of any Surplus Cash as determined under HUD
guidelines, and the Additional Loan interest is payable out of its share of
Surplus Cash. Any unpaid Additional Loan interest accrues at 7.5% per
annum. When the property is sold or refinanced, the Trust will receive 50%
of any net proceeds remaining after repayment of the insured mortgage, the
Additional Loan, the interest rate relief, accrued and unpaid Additional
Loan interest and the Borrower's equity up to the point that the Trust has
received a cumulative, non-compounded 10% preferred return on its
investment in the PIMI.
<PAGE>
Lifestyles operating results deteriorated during 1995, and the Trust
approved a two-year workout that effectively reduced the interest rate on
the insured mortgage by 1%. When that workout ended in 1997, the property
was not able to generate sufficient revenues to maintain the property and
service the original interest rate. Consequently, the borrower on the
Lifestyles PIMI defaulted on its May 1, 1998 debt service payment on the
insured first mortgage. The Trust agreed to a new workout that runs through
2007. Under its terms, the Trust agreed to reduce the effective interest
rate on the insured first mortgage by 1.75% retroactively for 1998 to clear
the default, by 1.75% for 1999, and by 1.5% each year thereafter until the
property is sold or refinanced. The borrower made a $550,000 equity
contribution, which has been escrowed, for the exclusive purpose of
correcting deferred maintenance and making capital improvements to the
property. Any Surplus Cash that is generated by property operations will be
split evenly between the Trust and the borrower. When the property is sold
or refinanced, the first $1,100,000 of any proceeds remaining after the
insured mortgage is paid off will be split 50% / 50%; the next $1,690,220
of proceeds will be split 75% to the Trust and 25% to the borrower; and any
remaining proceeds will be split 50% / 50%. The borrower's new equity and
the reduction in the effective interest rate on the insured first mortgage
will provide funds for repairs and improvements that should help reposition
Lifestyles so it can compete more effectively for new residents and rental
rates. As a result of the factors described above, the Advisor determined
that the Additional Loan collateralized by the Lifestyles asset was
impaired, and the Trust recorded a valuation allowance of $1,130,346 in the
fourth quarter of 1998 and continues to maintain that allowance.
Mountain View is similar to Lifestyles with respect to competitive market
conditions. In June 1999, the Trust approved a second workout that runs
through 2004. Under its terms, the Trust agreed to reduce the effective
interest rate on the insured first mortgage by 1.25% retroactively for 1999
and each year thereafter until the property is sold or refinanced, and to
change the participation terms. The workout eliminated the preferred return
feature, forgave $288,580 of previous accruals of Additional Loan interest
related to the first workout, and changed the Trust's participation in
Surplus Cash generated by the property. The Trust will receive 75% of the
first $130,667 of Surplus Cash and 50% of any remaining Surplus Cash on an
annual basis to pay Additional Loan interest. Unpaid Additional Loan
interest related to the second workout will accrue and be payable if there
are sufficient proceeds from a sale or refinancing of the property. In
addition, the borrower repaid $153,600 of the Additional Loan and funded
approximately $54,000 to a reserve for property improvements. As a result
of the factors described above, the Advisor determined that the Additional
Loan collateralized by the Mountain View asset was impaired and has
recorded a valuation allowance of $1,032,272 and continues to maintain that
allowance.
Whether the operating performance at any of the properties mentioned above
provide sufficient cash flow from operations to pay either the Additional
Loan interest or participation income will depend on factors that the Trust
has little or no control over. Should the properties be unable to generate
sufficient cash flow to pay the Additional Loan interest, it would reduce
the Trust's distributable cash flow and could affect the value of the
Additional Loan collateral.
There are contractual restrictions on the repayment of the PIMs and PIMIs.
During the first five years of the investment, borrowers are prohibited
from repayment. During the second five years, the PIM borrowers can prepay
the insured first mortgage by paying the greater of a prepayment premium or
the participation due at the time of the prepayment. Similarly, the PIMI
borrowers can prepay the insured first mortgage and the Additional Loan by
satisfying the Preferred Return obligation. The participation features and
Additional Loans are neither insured nor guaranteed. If the prepayment of
the PIM or PIMI results from the foreclosure on the underlying property or
an insurance claim, the Trust would probably not receive any participation
income or any amounts due under the Additional Loan.
The Trust has the option to call certain PIMs and all the PIMIs by
accelerating their maturity if the loans are not prepaid by the tenth year
after permanent funding. The Advisor will determine the merits of
exercising the call option for each PIM and PIMI as economic conditions
warrant. Such factors as the condition of the asset, local market
conditions, the interest rate environment and available financing will have
an impact on these decisions.
Results of Operations
The net income of the Trust for the nine months ended September 30, 2000
decreased by $4.3 million as compared to the nine months ended September
30, 1999 due primarily to decreases in interest income net of decreases in
asset management fees to an affiliate and amortization expense. Basic,
additional loan and participation interest income decreased in 2000 due to
the receipt of the Audubon Villas PIMI repayment during 1999. The Trust
received approximately $2.0 million of participation interest income when
the PIMI paid off. Interest income on MBS decreased for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999 due to principal collections reducing the MBS investment balance.
Other interest income decreased due to lower average cash balances while
asset management fees and amortization of prepaid expenses decreased due to
the payoff of the Audubon Villas PIMI in 1999.
<PAGE>
The Trust's net income decreased by $3.8 million for the three months ended
September 30, 2000 as compared to the three months ended September 30, 1999
due primarily to the reasons discussed 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. Additionally,
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Trust's investments in insured mortgages and MBS are guaranteed or
insured by Fannie Mae, 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.
Fannie Mae 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,
ability to maintain the properties and obtain adequate insurance coverage.
Operations also may be effected by 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 $5.2 million
of Agency paper, which is issued by Government Sponsored Enterprises with a
credit rating equal to the top rating category of a nationally recognized
statistical rating organization.
Interest Rate Risk
The Trust's primary market risk exposure is to interest rate risk, which
can be defined as the exposure of the Trust's net income, comprehensive
income or financial condition to adverse movements in interest rates. At
September 30, 2000, the Trust's PIMs, PIMIs and MBS comprise the majority
of the Trust's assets. As such, decreases in interest rates may accelerate
the prepayment of the Trust's investments. The Trust does not utilize any
derivatives or other instruments to manage this risk as the Trust plans to
hold all of its investments to expected maturity.
The Trust monitors prepayments and considers prepayment trends, as well as
dividend requirements of the Trust, when setting regular dividend policy.
For MBS, the fund forecasts prepayments based on trends in similar
securities as reported by statistical reporting entities such as Bloomberg.
For PIMs and PIMIs, the Trust incorporates prepayment assumptions into
planning as individual properties notify the Trust of the intent to prepay
or as they mature.
<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: October 29, 2000
<PAGE>
