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 March 31, 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
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
BALANCE SHEETS
ASSETS
<CAPTION>
March 31, December 31,
1996 1995
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
<S> <C> <C>
Insured mortgages $150,421,994 $150,448,995
Additional loans 29,952,351 29,952,351
Participating Insured Mortgages ("PIMs")
(Note 2) 46,932,699 45,436,663
Mortgage-Backed Securities ("MBS")
(Note 3) 45,165,959 48,851,858
Total mortgage investments 272,473,003 274,689,867
Cash and cash equivalents 11,375,426 11,675,494
Prepaid acquisition fees and expenses, net of
accumulated amortization of $3,319,663 and
$2,922,496, repectively 13,163,979 13,561,146
Prepaid participation servicing fees, net of
accumulated amortization of $877,497 and
$761,220, repectively 4,617,050 4,733,327
Interest receivable and other assets 2,066,384 2,305,349
Total assets $303,695,842 $306,965,183
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 1,304,338 1,026,622
Other liabilities 8,384 20,576
Total liabilities 1,312,722 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 302,764,362 304,530,460
Unrealized gain (loss) on MBS (381,242) 1,387,525
Total Shareholders' equity 302,383,120 305,917,985
Total liabilities and Shareholders'
equity $303,695,842 $306,965,183
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
For the Three Months
Ended March 31,
1996 1995
Revenue:
Interest income - PIMs and PIMIs:
<S> <C> <C>
Base interest $3,494,617 $2,749,292
Additional loan interest 380,495 409,035
Participation interest 379,237 277,123
Interest income - MBS 833,100 1,613,363
Interest income - other 146,941 210,705
Total revenue 5,234,390 5,259,518
Expenses:
Asset management fee to an affiliate 517,116 534,266
Expense reimbursements to affiliates 122,478 127,394
Amortization of prepaid fees and expenses,
and organization costs 515,944 421,831
General and administrative 103,849 96,948
Loss on sale of MBS - 1,400,000
Total expenses 1,259,387 2,580,439
Net income $3,975,003 $2,679,079
Earnings per Share $ .22 $ .15
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 Three Months Ended
March 31,
1996 1995
Operating activities:
<S> <C> <C>
Net income $ 3,975,003 $ 2,679,079
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of MBS - 1,400,000
Premium amortization 41,866 80,076
Amortization of prepaid fees and expenses
and organization costs 515,944 421,831
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 236,465 527,655
Decrease in other liabilities (12,192) (3,045)
Net cash provided by operating
activities 4,757,086 5,105,596
Investing activities:
Investment in PIMs and insured mortgages (1,850,779) (15,147,846)
Investment in Additional Loans - (2,000,000)
Principal collections on MBS 1,875,266 3,120,773
Principal collections on PIMs 381,744 295,973
Increase in deferred income on Additional
Loans 277,716 268,365
Net cash provided by (used for)
investing activities 683,947 (13,462,735)
Financing activity:
Dividends (5,741,101) (5,741,101)
Net decrease in cash and cash equivalents (300,068) (14,098,240)
Cash and cash equivalents, beginning of period 11,675,494 19,649,192
Cash and cash equivalents, end of period $11,375,426 $ 5,550,952
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
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 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 March 31, 1996 and the results of its
operations and its cash flows for the three months ended March 31, 1996
and 1995.
The results of operations for the three months ended March 31, 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 March 31, 1996, the Trust has commitments to fund approximately
$4,631,000 on its closed PIMs and PIMIs. These commitments will be
funded by cash on hand and future principal collections from the MBS,
PIMs and PIMIs.
At March 31, 1996, the Partnership s PIMs and PIMIs have a fair value
of approximately $218,617,000 and gross unrealized losses of
approximately $8,690,000. The PIMs and PIMIs have maturities ranging
from 2008 to 2036.
3. MBS
At March 31, 1996, the Trust's MBS portfolio has an amortized cost of
approximately $45,547,000 and gross unrealized gains and losses of
approximately $329,000 and $710,000. The MBS portfolio has maturities
ranging from 2008 to 2023.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Shareholder's Equity
A summary of changes in Shareholders' equity for the three months ended
March 31, 1996 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain(Loss) Equity
Balance at
<S> <C> <C> <C> <C>
December 31, 1995 $304,530,460 $ - $ 1,387,525 $305,917,985
Net income - 3,975,003 - 3,975,003
Dividends (1,766,098) (3,975,003) - (5,741,101)
Decrease in unrealized
gain on MBS - - (1,768,767) (1,768,767)
Balance at March 31, 1996 $302,764,362 $ - $ (381,242) $302,383,120
</TABLE>
5. Related Party Transactions
During the three months ended March 31, 1996 and 1995, the Trust
earned $147,761 and $147,761, respectively, of interest on an
Additional Loan with affiliates of the Advisor.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $4,631,000 on its PIMs and PIMIs. These
commitments will be funded by cash on hand and future principal collections
from the MBS, PIMs and PIMIs. If total cash inflows decrease, the Trust
may need to make periodic adjustments to dividends paid to the investors in
order to maintain sufficient liquidity.
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
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 repaying. For the second five years, the borrowers can
repay 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.
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands, except per Share amounts)
Three Months Inception
Ended Through
3/31/96 3/31/96
Distributable Cash Flow (a):
<S> <C> <C>
Net income $ 3,975 $ 56,381
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 516 4,242
Additional loan interest and deferred 278 1,305
Total Distributable Cash Flow ("DCF") $ 4,769 $ 63,307
DCF per Share based on Shares outstanding
at March 31, 1996 $ .26 $ 3.45 (c)
Dividends:
Total dividends to Shareholders $ 5,741 (b) $101,162 (b)
Average dividend per Share based on Shares
outstanding at March 31, 1996 $ .32 (b) $ 5.51 (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 May 1996 distribution.
(c) Shareholders average per Share return of capital as of May 1996 is
$2.06 [$5.51 - $3.45]. 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.
<PAGE>
Operations
The following discussion relates to the operations of the Trust during
the three months ended March 31, 1996 and 1995. (Amounts in thousands,
except per Share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
Amount Per Share Amount Per Share
Interest income on PIMs and
PIMIs:
<S> <C> <C> <C> <C>
Base interest $3,495 $.19 $2,749 $.15
Additional loan interest
received including amounts
deferred 658 .03 677 .04
Participation interest 379 .02 277 .01
Interest income on MBS 833 .05 1,613 .09
Interest income - other 147 .01 211 .01
Trust expenses (743) (.04) (758) (.04)
DCF 4,769 .26 4,769 .26
Reconciliation to net income:
Loss on sale of MBS - - (1,400) (.08)
Additional loan interest
deferred (278) (.02) (268) (.01)
Amortization of prepaid fees
and expenses and organization
costs (516) (.02) (422) (.02)
Net income $3,975 .22 $2,679 .15
Weight Average Shares
Outstanding 18,371,477 18,371,477
</TABLE>
The Trust's net income increased $1,296,000 during the first quarter of
1996 as compared to the first quarter of 1995 primarily because the Trust
recognized a $1,400,000 loss on the sale of MBS in the first quarter of
1995. In April 1995, the Trust sold approximately $40 million of MBS and
used the proceeds to fund the acquisition of PIMs and PIMIs. Interest
income on MBS decreased $780,000 during the first quarter of 1996 versus
the first quarter of 1995 due primarily to the sale of MBS. The Trust
invested approximately $52.6 million in PIMs and PIMIs in 1995 having base
interest rates ranging from 6.875% to 7.875% per annum, which increased
base interest income on PIMs and PIMIs by $746,000 during the first three
months of 1996 as compared to the first three months of 1995. Overall,
total revenue did not change materially between the first quarter of 1996
and first quarter of 1995. The Trust experienced a $102,000 increase in
participation interest income during the first three months of 1996 versus
the corresponding period in 1995. Amortization of prepaid fees and
expenses increased $94,000 in the first quarter of 1996 as compared to the
first quarter of 1995, because 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
<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 II
(Registrant)
BY: /s/Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer of
Krupp Government Income Trust II.
DATE: April 24, 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 qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,375,426
<SECURITIES> 272,473,003<F1>
<RECEIVABLES> 2,066,384
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,781,029<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 303,695,842
<CURRENT-LIABILITIES> 1,312,722<F3>
<BONDS> 0
0
0
<COMMON> 302,764,362
<OTHER-SE> (381,242)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 303,695,842
<SALES> 0
<TOTAL-REVENUES> 5,234,390<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,259,387<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,975,003
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,975,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,975,003
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMIs")(insured mortgages
of $150,421,994 and Additional Loans of $29,952,351), Participating Insured
Mortgages ("PIMs") of $46,932,699 and Mortgage-backed securities ("MBS") of
$45,165,959.
<F2>Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $3,319,663 and prepaid participation servicing fees
of $5,494,547 net of accumulated amortization of $877,497.
<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 $515,944 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
