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, 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 0-20164
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
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>
<CAPTION>
BALANCE SHEETS
ASSETS
June 30, December 31,
1997 1996
<S> <C> <C>
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
Insured mortgages $149,762,792 $150,454,030
Additional loans 30,417,351 29,952,351
Participating Insured Mortgages ("PIMs")
(Note 2) 49,424,899 49,622,337
Mortgage-Backed Securities and multi-family
insured mortgage loan ( MBS")
(Note 3) 38,108,620 40,581,650
Total mortgage investments 267,713,662 270,610,368
Cash and cash equivalents 9,715,995 9,214,592
Prepaid acquisition fees and expenses, net of
accumulated amortization of $5,305,009 and
$4,510,838, respectively 11,178,633 11,972,804
Prepaid participation servicing fees, net of
accumulated amortization of $1,523,937 and
$1,260,283, respectively 3,970,610 4,234,264
Interest receivable and other assets 1,965,538 2,264,687
Total assets $294,544,438 $298,296,715
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 1,698,819 $ 1,582,054
Other liabilities 16,040 27,085
Total liabilities 1,714,859 1,609,139
Commitments (Note 2)
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 292,918,122 296,565,241
Unrealized gain (loss) on MBS (88,543) 122,335
Total Shareholders' equity 292,829,579 296,687,576
Total liabilities and Shareholders' equity $294,544,438 $298,296,715
</TABLE>
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<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
<CAPTION>
STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Interest income - PIMs and
PIMIs:
Base interest $3,636,543 $3,484,128 $ 6,990,634 $ 6,978,745
Additional loan interest 417,443 380,495 1,028,911 760,990
Participation interest 161,000 100,745 652,525 479,982
Interest income - MBS 706,558 782,112 1,435,740 1,615,212
Interest income - other 135,766 136,600 256,478 283,541
Total revenues 5,057,310 4,884,080 10,364,288 10,118,470
Expenses:
Asset management fee to an
affiliate 496,278 513,082 1,000,721 1,030,198
Expense reimbursements to
affiliates 108,482 96,436 229,392 218,914
Amortization of prepaid expenses
and fees, and organization
costs 523,078 516,747 1,057,825 1,032,691
General and administrative 107,007 92,581 241,269 196,430
Total expenses 1,234,845 1,218,846 2,529,207 2,478,233
Net income $3,822,465 $3,665,234 $ 7,835,081 $ 7,640,237
Earnings per share $ .21 $ .20 $ .43 $ .42
Weighted average shares
outstanding 18,371,477 18,371,477
</TABLE>
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<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
1997 1996
<S> <C> <C>
Operating activities:
Net income $ 7,835,081 $ 7,640,237
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 49,087 94,754
Amortization of prepaid expenses and fees,
and organization costs 1,057,825 1,032,691
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 299,149 45,769
Increase (decrease) in other liabilities (11,045) 1,198
Net cash provided by operating
activities 9,230,097 8,814,649
Investing activities:
Investment in PIMs and Insured Mortgages - (4,018,711)
Investment in Additional Loans (465,000) -
Investment in MBS - (591,600)
Principal collections on MBS 2,213,065 4,302,518
Principal collections on PIMs 888,676 770,996
Increase in deferred income on Additional
Loans 116,765 277,716
Net cash provided by investing
activities 2,753,506 740,919
Financing activity:
Dividends (11,482,200) (11,482,200)
Net (decrease) increase in cash and cash
equivalents 501,403 (1,926,632)
Cash and cash equivalents, beginning of period 9,214,592 11,675,494
Cash and cash equivalents, end of period $ 9,715,995 $ 9,748,862
</TABLE>
<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.
The Trust accounts for all of its investment 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 Standard
No. 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 primarily of
normal recurring accruals) necessary to present fairly the Trust's
financial position as of June 30, 1997, the results of its operations
for the three and six months ended June 30, 1997 and 1996 and its cash
flows for the six months ended June 30, 1997 and 1996.
The results of operations for the three and six months ended June 30,
1997 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
During the second quarter of 1997, the Trust funded an additional
$465,000 to the present owner of the Willows Apartments increasing
the Additional Loan amount to $1,265,000.
At June 30, 1997, the Trust has commitments to fund approximately
$1,006,000 on its closed PIMs and PIMIs. These commitments will be
funded by cash on hand and future principal collections from the MBS,
-7-
<PAGE>
PIMs and insured mortgages.
At June 30, 1997, the Trust s PIMs and PIMIs have a fair value of
$226,863,647 and gross unrealized gains and losses of $2,753 and
$2,744,148, respectively. The PIMs and PIMIs have maturities ranging
from 2008 to 2036. At June 30, 1997 there are no loans within the
Trust s portfolio that are delinquent of principal or interest.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At June 30, 1997, the Trust's MBS portfolio has an amortized cost of
approximately $38,197,163 and gross unrealized gains and losses of
approximately $330,961 and $419,504. The MBS portfolio has maturities
ranging from 2008 to 2023.
4. Changes in Shareholder's Equity
A summary of changes in Shareholders' equity for the six months ended
June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain(Loss) Equity
<S> <C> <C> <S> <C> <C> <C>
Balance at December 31,
1996 $296,565,241 $ - $ 122,335 $296,687,576
Net income - 7,835,081 - 7,835,081
Dividends (3,647,119) (7,835,081) - (11,482,200)
Change in unrealized
gain on MBS - - (210,878) (210,878)
Balance at June 30, 1997 $292,918,122 $ - $ (88,543) $292,829,579
</TABLE>
5. Related Party Transactions
During the three months ended June 30, 1997 and June 30, 1996 the Trust
received $56,471 and $0 of interest income on Additional Loans from
affiliates of the Advisor. During the six month ended June 30, 1997 and
1996, the Trust received $254,732 and $147,761 of interest income on
Additional Loans from affiliates of the Advisor.
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 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
At June 30, 1997 the Trust has significant liquidity consisting of cash
and cash equivalents, of approximately $9.7 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 are quarterly
dividends paid to investors of approximately $5.7 million. Funds for
dividends come from interest income received on PIMs, PIMIs, MBS and 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.
During the second quarter of 1997, the Trust funded an additional
$465,000 to the present owner of the Willows Apartments increasing the
Additional Loan amount to $1,265,000. Subsequent to the funding, the
present owner notified the Trust of its intention to sell the property to
a third party during the third quarter. The Trust agreed to accept a
prepayment of the Additional Loan and to allow the purchaser to assume
the first mortgage, subject to certain conditions including a payment in
full of all Preferred Interest due on the Trust s investment in the PIMI.
Should this transaction take place, the Trust investment will convert from
a PIMI to an insured mortgage.
Windmill Lakes operating performance during the second quarter
continued to be adversely affected by the highly competitive housing in
Pembroke Pines, Florida. New construction in all housing sectors is being
fueled by strong job and population growth in the area. Builders
marketing concessions to fill new properties lowers the cost of renting a
new apartment and makes it more difficult for older properties like
Windmill Lakes to attract residents. The Advisor continues to monitor
this property closely.
In addition to funding its quarterly dividends paid to investors the
Trust has a remaining commitment of approximately $1.0 million on a PIM in
the construction phase. The Trust has sufficient cash reserves to fund
this commitment.
The Advisor of the Trust periodically reviews the dividend rate to
determine whether an adjustment 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. 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
all amounts due under the PIMIs and satisfying the required preferred
return. The Trust has the option of calling 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.
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 ), 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, 1997 and 1996.
The Trust s net income increased slightly during the second quarter of
1997 as compared to the second quarter of 1996 due to increases in base
interest, participation interest and additional loan interest of $153,000,
$59,000 and $37,000, respectively. The increase in base interest is
primarily due to the construction-in-process of the Fountains Apartments
in 1996 as the property is nearing 100% completion during 1997. The Trust
received participation income from Mequon Trail, Oasis at Springtree,
Crossing Village and The Willows Apartments of $72,000, $43,000, $25,000
and $20,000. This was offset by decreases in MBS interest of $75,000.
The Trust s net income increased slightly during the six months ended June
30, 1997 as compared to the six months ended June 30, 1996 due to
increases in additional loan interest and participation interest of
$268,000 and $172,000, respectively. The increase in additional loan
interest is due to the Trust receiving and recognizing as interest income
additional loan interest payments from The Seasons. The Trust received
participation income from St. Germain, The Lakes, Oasis
<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> 0000872467
<NAME> KRUPP GOVERNMENT INCOME TRUST II
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,715,995
<SECURITIES> 267,713,662<F1>
<RECEIVABLES> 1,965,538
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,149,423<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 294,544,438
<CURRENT-LIABILITIES> 1,714,859<F3>
<BONDS> 0
0
0
<COMMON> 298,918,122
<OTHER-SE> (88,543)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 294,544,438
<SALES> 0
<TOTAL-REVENUES> 10,364,288<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,529,207<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,835,081
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,835,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,835,081
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Partcipating Insured Mortgage Investments ("PIMIs") (insured mortgages
of $149,762,792 and Additional Loans of $30,417,351), Participating Insured
Mortgages ("PIMs") of $49,424,899 and Mortgage-Backed Securities ("MBS") of
$38,108,620.
<F2>Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $5,305,009 and prepaid participating servicing of
$5,494,457 net of accumulated amortization of $1,523,937.
<F3>Includes deferred income on Additional Loans of $1,698,819.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $1,057,825 of amortization for prepaid fees and expenses.
</FN>
</TABLE>
