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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20164
Krupp Government Income Trust II
Massachusetts 04-3073045
(State or other jurisdiction of (IRS employer
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
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of
factors, including those identified herein.
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
BALANCE SHEETS
ASSETS
<PAGE>
<CAPTION>
June 30, December 31,
1996 1995
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
<S> <C>
Insured mortgages $150,115,142 $150,448,995
Additional loans 29,952,351 29,952,351
Participating Insured Mortgages ("PIMs")
(Note 2) 49,018,231 45,436,663
Mortgage-Backed Securities and multi-family
insured mortgage loan ( MBS")
(Note 3) 42,450,107 48,851,858
Total mortgage investments 271,535,831 274,689,867
Cash and cash equivalents 9,748,862 11,675,494
Prepaid acquisition fees and expenses, net of
accumulated amortization of $3,716,829 and
$2,922,496, respectively 12,766,813 13,561,146
Prepaid participation servicing fees, net of
accumulated amortization of $994,578 and
$761,220, respectively 4,499,969 4,733,327
Interest receivable and other assets 2,254,580 2,305,349
Total assets $300,806,05 $306,965,183
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 1,304,338 $ 1,026,622
Other liabilities 21,774 20,576
Total liabilities 1,326,112 1,047,198
Commitments (Note 2)
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 300,688,497 304,530,460
Unrealized gain (loss) on MBS (1,208,554) 1,387,525
Total Shareholders' equity 299,479,943 305,917,985
Total liabilities and Shareholders' equity $300,806,055 $306,965,183
</TABLE>
<PAGE>
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Revenues:
Interest income - PIMs and
PIMIs:
<S> <C> <C> <C> <C>
Base interest $3,484,128 $2,958,096 $ 6,978,745 $ 5,707,388
Additional loan interest 380,495 299,995 760,990 709,030
Participation interest 100,745 - 479,982 277,123
Interest income - MBS 782,112 1,222,393 1,615,212 2,835,756
Interest income - other 136,600 352,660 283,541 563,365
Total revenues 4,884,080 4,833,144 10,118,470 10,092,662
Expenses:
Asset management fee to an
affiliate 513,082 526,059 1,030,198 1,060,325
Expense reimbursements to
affiliates 96,436 127,394 218,914 254,788
Amortization of prepaid expenses
and fees, and organization
costs 516,747 455,067 1,032,691 876,898
General and administrative 92,581 122,487 196,430 219,435
Loss on sale of MBS - (20,926) - 1,379,074
Total expenses 1,218,846 1,210,081 2,478,233 3,790,520
Net income $3,665,234 $3,623,063 $ 7,640,237 $ 6,302,142
Earnings per share $ .20 $ .19 $ .42 $ .34
Weighted average shares
outstanding 18,371,477 18,371,477
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Six Months
Ended June 30,
1996 1995
Operating activities:
<S> <C> <C>
Net income $ 7,640,237 $ 6,302,142
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of MBS - 1,379,074
Premium amortization 94,754 150,736
Amortization of prepaid expenses and fees,
and organization costs 1,032,691 876,898
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 45,769 369,061
Increase in other liabilities 1,198 15,070
Net cash provided by operating
activities 8,814,649 9,092,981
Investing activities:
Investment in PIMs and Insured Mortgages (4,018,711) (19,334,046)
Investment in Additional Loans - (6,600,000)
Investment in MBS (591,600) -
Proceeds from the sale of MBS - 39,885,582
Principal collections on MBS 4,302,518 5,629,910
Principal collections on PIMs 770,996 609,607
Increase in deferred income on Additional
Loans 277,716 268,365
Net cash provided by investing
activities 740,919 20,459,418
Financing activity:
Dividends (11,482,200) (11,482,201)
Net (decrease) increase in cash and cash
equivalents (1,926,632) 18,070,198
Cash and cash equivalents, beginning of period 11,675,494 19,649,192
Cash and cash equivalents, end of period $ 9,748,862 $37,719,390
</TABLE>
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
<PAGE>
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on
Form 10-Q pursuant to the Rules and Regulations of the Securities and
Exchange Commission. However, in the opinion of Berkshire Mortgage
Advisors Limited Partnership (the "Advisor"), the Advisor to Krupp
Government Income Trust II (the "Trust"), the disclosures contained in
this report are adequate to make the information presented not
misleading. See Notes to Financial Statements in the Trust's Form 10-
K for the year ended December 31, 1995 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 primarily of
normal recurring accruals) necessary to present fairly the Trust's
financial position as of June 30, 1996, the results of its operations
for the three and six months ended June 30, 1996 and 1995 and its cash
flows for the six months ended June 30, 1996 and 1995.
The results of operations for the three and six months ended June 30,
1996 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, 1996, the Trust has commitments to fund approximately
$2,809,000 on its closed PIMs and PIMIs. These commitments will be
funded by cash on hand and future principal collections from the MBS,
PIMs and insured mortgages.
At June 30, 1996, the Partnership s PIMs and PIMIs have a fair value
of approximately $217,233,000 and gross unrealized losses of
approximately $11,852,000. The PIMs and PIMIs have maturities ranging
from 2008 to 2036.
3. MBS
At June 30, 1996, the Trust's MBS portfolio has an amortized cost of
approximately $43,659,000 and gross unrealized gains and losses of
approximately $77,000 and $1,286,000. The MBS portfolio has
maturities ranging from 2008 to 2023.
During May 1996, the Trust invested in a $591,600 face value Federal
Housing Administration - insured first mortgage loan having an interest
rate of 8.125% and maturing in 2031. The borrower may not prepay the first
mortgage loan for a period of five years and thereafter may prepay the
first mortgage loan subject to a 5% prepayment penalty that declines
1% annually during the following five years. There is no prepayment
penalty after the tenth year.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
<PAGE>
4. Changes in Shareholder's Equity
A summary of changes in Shareholders' equity for the six months ended
June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain(Loss) Equity
Balance at December 31,
<C> <C> <C> <C> <C>
1995 $304,530,460 $ - $ 1,387,525 $305,917,985
Net income - 7,640,237 - 7,640,237
Dividends (3,841,963) (7,640,237) - (11,482,200)
Change in unrealized
gain on MBS - - (2,596,079) (2,596,079)
Balance at June 30, 1996 $300,688,497 $ - $(1,208,554) $299,479,943
</TABLE>
.
5. Related Party Transactions
During each of the six month periods ended June 30, 1996 and
1995, the Trust received $147,761 of interest on an Additional
Loan with an affiliate of the Advisor.
<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 are quarterly
dividends paid to investors of approximately $5.7 million. Funds used for
dividends come from interest received on the PIMs, PIMIs, MBS, cash and
cash equivalents net of operating expenses, and certain principal
collections received on the PIMs and MBS. The Trust funds a portion of the
dividends from principal collections, as a result, the capital resources of
the Trust will continually decrease. As the capital resources decrease,
the total cash inflows to the Trust will also decrease which will result in
periodic adjustments to the quarterly dividends paid to investors.
In addition to funding its quarterly dividends paid to investors the
Trust has commitments to fund $2,809,000 on its PIMs and PIMIs. These
commitments will be funded by cash on hand and future principal collections
from the MBS, PIMs and PIMIs.
The Advisor of the Trust periodically reviews the dividend rate to
determine whether an adjustment to the dividend rate is necessary based on
projected future cash flows. Based on current projections, the Advisor
believes the Trust can maintain the current dividend rate for the
foreseeable future. In general, the Advisor tries to set a dividend rate
that provides for level quarterly distributions of cash available for
distribution. To the extent quarterly dividends do not fully utilize the
cash available for distribution and cash balances increase, the Advisor may
reinvest the available proceeds, adjust the dividend rate or distribute
such funds through a special distribution.
For the first five years of the PIMs and PIMIs the borrowers are
prohibited from prepaying. For the second five years, the borrowers can
prepay the loans incurring a prepayment penalty for PIMs or paying all
amounts due under the PIMIs and satisfying the required preferred return.
The Trust has the option 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 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.
<TABLE>
(Amounts in thousands, except per Share amounts)
<CAPTION>
Six Months Inception
Ended Through
6/30/96 6/30/96
Distributable Cash Flow (a):
<S> <C> <C>
Net income $ 7,640 $ 60,046
Items providing or not requiring
the use of operating funds:
Loss on sale of MBS - 1,379
Amortization of prepaid fees and
expenses and organization costs 1,033 4,759
<PAGE>
Additional loan interest received
and deferred 278 1,305
Total Distributable Cash Flow ("DCF") $ 8,951 $ 67,489
DCF per Share based on Shares outstanding
at June 30, 1996 $ .49 $ 3.68 (c)
Dividends:
Total dividends to Shareholders $11,482 (b) $106,903 (b)
Average dividend per Share based on Shares
outstanding at June 30, 1996 $ .62 (b) $ 5.81 (b)(c)
</TABLE>
(a) Distributable Cash Flow consists of income before
amortization of prepaid fees and expenses and organization
costs and before the effect of any gains or losses from the
sale of assets and includes interest collections on
Additional Loans.
(b) Includes an estimate of the August 1996 distribution.
(c) Shareholders average per Share return of capital as of
August 1996 is $2.13 [$5.81 - $3.68]. Return of capital
represents that portion of dividends which is not funded
from DCF, such as proceeds from the sale of assets and
substantially all of the principal collections received from
MBS and PIMs.
Assessment of Credit Risk
The Partnership'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 United States 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. However, obligations of FNMA
are not backed by the U.S. Government. FNMA is one of the largest
corporations in the United States and the Secretary of the Treasury of the
United States has discretionary authority to lend up to $2.25 billion to
FNMA at any time. 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. HUD, an agency
of the U.S. Government, insures the obligations originated under its
programs which 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 and ability to maintain occupancy levels, control
operating expenses, maintain 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, 1996 and 1995.
<TABLE>
<CAPTION>
(Amounts in thousands, except per Share amounts):
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
Interest income on PIMs
and PIMIs:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Base interest $3,484 $ .19 $2,958 $ .16 $6,979 $ .38 $5,707 $ .31
Additional loan
interest 381 .02 300 .01 761 .04 709 .04
Participation interest 101 .01 - - 480 .03 277 .01
Interest income on MBS 782 .04 1,223 .06 1,615 .09 2,836 .15
Other interest income 137 .01 352 .02 284 .02 563 .03
Trust expenses (703) (.04) (776) (.03) (1,446) (.08) (1,534) (.07)
Loss on sale of MBS - - 21 - - - (1,379) (.08)
Amortization of prepaid
fees and expenses (517) (.03) (455) (.03) (1,033) (.06) (877) (.05)
Net income 3,665 .20 3,623 .19 7,640 .42 6,302 .34
Reconciliation to DCF:
Loss on sale of MBS - - (21) - - - 1,379 .08
Additional loan
interest deferred - - - - 278 .01 268 .01
Amortization of
prepaid fees and
expenses and
organization
costs 517 .03 455 .03 1,033 .06 877 .05
DCF $4,182 $ .23 $4,057 $ .22 $8,951 $ .49 $8,826 $ .48
Weighted average
Shares outstanding 18,371,477 18,371,477
</TABLE>
The Trust s net income increased $42,000 during the second quarter of 1996
as compared to the second quarter of 1995 due primarily to higher interest
income. Interest income on PIMs and PIMIs increased $708,000 in the second
quarter of 1996 as compared to the second quarter of 1995 due to the
investments in PIMs in PIMIs made during 1995, which the Trust funded
primarily with the proceeds from the sale of MBS. As a result of the sale
of approximately $40 million of MBS in the second quarter of 1995, interest
income on MBS declined during the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995. Other interest income
declined in 1996 as compared to 1995 due to lower cash balances available
for short-term investment in 1996. Amortization expense increased in the
second quarter of 1996 as compared to the second quarter of 1995, because
the Trust began amortizing prepaid fees and expenses associated with newly
acquired PIMs and PIMIs. However, the higher amortization expense was
offset by lower Trust expenses resulting primarily from lower expense
reimbursements to affiliates and general and administative expenses.
The Trust s net income increased $1,338,000 for the six months ended June
30, 1996 as compared to the corresponding period in 1995, because in 1995
the Trust realized a $1,379,000 loss on the sale of MBS. Base interest on
PIMs and PIMIs increased approximately $1,272,000 during the first half of
1996 as compared to the first half of 1995 as a result of investments in
PIMs and insured mortgages made in 1995 of approximately $46 million with
<PAGE>
interest rates ranging from 6.875% to 7.875% per annum. The Trust also
experienced a $203,000 increase in participation interest income during the
six months ended June 30, 1996 as compared to the six months ended June 30,
1995. Interest income on MBS decreased $1,221,000 during the six months
ended June 30, 1996 as compared to the six months ended June 30, 1995 as a
result of the sale of approximately $40 million of MBS in April 1995.
Other interest income declined approximately $279,000 during the first half
of 1996 versus the first half of 1995 as a result of lower cash balances
available for short-term investment. Amortization expense increased as the
Trust began amortizing prepaid fees and expenses on newly acquired PIMs and
PIMIs.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Response: None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Krupp Government Income Trust II
(Registrant)
BY: /s/Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer of
Krupp Government Income Trust II.
DATE: August 5, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of income and is qualfied in its entirety by reference to
such financial statements
</LEGEND>
<CIK> 0000872467
<NAME> KRUPP GOVERNEMNT INCOME TRUST-II
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,748,862
<SECURITIES> 271,535,831<F1>
<RECEIVABLES> 2,254,580
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,266,782<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 300,806,055
<CURRENT-LIABILITIES> 1,326,112<F3>
<BONDS> 0
0
0
<COMMON> 300,688,497
<OTHER-SE> (1,208,554)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 300,806,055
<SALES> 0
<TOTAL-REVENUES> 10,118,470<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,478,233<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,640,237
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,640,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,640,237
<EPS-PRIMARY> .42
<EPS-DILUTED> 0
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $150,115,142 and Additional Loans of $29,952,351), Participating
Insured Mortgages ("PIMs") of $49,018,231 and Mortgage-Backed Securities
("MBS") of $42,450,107
<F2>Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $3,716,829 and prepaid participation servicing fees
of $5,494,547 net of accumulated amortization of $994,578
<F3>Includes deferred income on Additional Loans of $1,304,338
<F4>Unrealized loss on MBS
<F5>Represents interest income on investments in mortgages and cash
<F6>Includes $1,032,691 of amortization expense for prepaid fees and expenses
</FN>
</TABLE>
