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, 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.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
BALANCE SHEETS
<CAPTION>
ASSETS
March 31, December 31,
1997 1996
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
<S> <C> <C>
Insured mortgages $150,117,411 $150,454,030
Additional loan 29,952,351 29,952,351
Participating Insured Mortgages ("PIMs")
(Note 2) 49,529,348 49,622,337
Mortgage-Backed Securities ("MBS")
(Note 3) 38,227,100 40,581,650
Total mortgage investments 267,826,210 270,610,368
Cash and cash equivalents 10,365,473 9,214,592
Prepaid acquisition fees and expenses, net of
accumulated amortization of $4,912,429 and
$4,510,838, respectively 11,571,213 11,972,804
Prepaid participation servicing fees, net of
accumulated amortization of $1,393,439 and
$1,260,283, respectively 4,101,108 4,234,264
Interest receivable and other assets 1,644,180 2,264,687
Total assets $295,508,184 $298,296,715
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 1,656,546 $ 1,582,054
Other liabilities 6,287 27,085
Total liabilities 1,662,833 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 294,836,757 296,565,241
<PAGE>
Unrealized (loss) gain on MBS (991,406) 122,335
Total Shareholders' equity 293,845,351 296,687,576
Total liabilities and Shareholders'
equity $295,508,184 $298,296,715
</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,
1997 1996
Revenue:
<S> <C> <C>
Interest income - PIMs and PIMIs:
Base interest $3,354,091 $3,494,617
Additional loan interest 611,468 380,495
Participation interest 491,525 379,237
Interest income - MBS 729,182 833,100
Interest income - other 120,712 146,941
Total revenue 5,306,978 5,234,390
Expenses:
Asset management fee to an affiliate 504,443 517,116
Expense reimbursements to affiliates 120,910 122,478
Amortization of prepaid fees and expenses,
and organization costs 534,747 515,944
General and administrative 134,262 103,849
Total expenses 1,294,362 1,259,387
Net income $4,012,616 $3,975,003
Earnings per Share $ .22 $ .22
Weighted average Shares outstanding 18,371,477 18,371,477
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
For The Three Months Ended
March 31,
1997 1996
Operating activities:
<S> <C> <C>
Net income $4,012,616 $ 3,975,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 23,329 41,866
Amortization of prepaid fees and expenses
and organization costs 534,747 515,944
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 620,507 236,465
Decrease in other liabilities (20,798) (12,192)
Net cash provided by operating
activities 5,170,401 4,757,086
Investing activities:
Investment in PIMs and insured mortgages - (1,850,779)
Principal collections on MBS 1,217,480 1,875,266
Principal collections on PIMs 429,608 381,744
Increase in deferred income on Additional
Loans 74,492 277,716
Net cash provided by investing activities 1,721,580 683,947
Financing activity:
Dividends (5,741,100) (5,741,101)
Net increase(decrease) in cash and
cash equivalents 1,150,881 (300,068)
Cash and cash equivalents, beginning of period 9,214,592 11,675,494
Cash and cash equivalents, end of period $10,365,473 $11,375,426
</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, 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 March 31, 1997 and the results of its
operations and its cash flows for the three months ended March 31,
1997 and 1996.
The results of operations for the three months ended March 31, 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
At March 31, 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,
PIMs and PIMIs.
At March 31, 1997, the Partnership s PIMs and PIMIs have a fair value
of approximately $219,287,576 and gross unrealized losses of
approximately $10,311,534. The PIMs and PIMIs have maturities ranging
from 2008 to 2036.
3. MBS
At March 31, 1997, the Trust's MBS portfolio has an amortized cost of
approximately $39,218,506 and gross unrealized gains and losses of
approximately $92,576 and $1,083,982. The MBS portfolio has
maturities ranging from 2008 to 2023.
<PAGE>
Continued
<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, 1997 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain(Loss) Equity
<S> <C> <C> <C> <C>
Balance at December 31,
1996 $296,565,241 $ - $ 122,335 $296,687,576
Net income - 4,012,616 - 4,012,616
Dividends (1,728,484) (4,012,616) - (5,741,100)
Decrease in unrealized
gain on MBS - - (1,113,741) (1,113,741)
Balance at March 31, 1997 $294,836,757 $ - $ (991,406) $293,845,351
</TABLE>
5. Related Party Transactions
During the three months ended March 31, 1997 and 1996, the Trust received
$198,261 and $147,761, respectively, of interest on an Additional Loan
with 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 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
At March 31, 1997 the Trust has significant liquidity consisting of cash
and cash equivalents, of approximately $10 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.
<PAGE>
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.
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 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. 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 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 Trust'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. 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. However, obligations of FNMA are not backed by the U.S.
Government. 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
conventional real estate lending, including: reliance on the owner's
operating skills and ability to maintain occupancy levels, control
<PAGE>
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.
The Trust includes in cash and cash equivalents approximately $2 million of
commercial paper, which is issued by entities with a credit rating equal to
one of the top two rating categories of a nationally recognized statistical
rating organization.
Operations
The following discussion relates to the operations of the Trust during
the three ended March 31, 1997 and 1996. (Amounts in thousands, except per
Share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
Per Per
Amount Share Amount Share
<S> <C> <C> <C> <C>
Interest income on PIMs and
PIMIs: $3,354 $.18 $3,495 $.19
Base interest
Additional loan interest
received including amounts
deferred 611 .03 380 .02
Participation interest 492 .03 379 .02
Interest income on MBS 729 .04 833 .05
Interest income - other 121 .01 147 .01
Trust expenses (759) (.05) (743) (.04)
Amortization of prepaid fees
and expenses and organization
costs (535) (.02) (516) (.03)
Net income $4,013 $.22 $3,975 $.22
Weight Average Shares
Outstanding 18,371,477 18,371,477
</TABLE>
The Trust s net income increased slightly during the first quarter of 1997
as compared to the first quarter of 1996 due to increases in additional
loan interest and participation interest of $232,000 and $113,000,
respectively. This was offset by decreases in base interest , MBS interest
and other interest of $141,000, $104,000 and $26,000 respectively. As
principal collections reduce the Trust s investments in MBS, PIMS and
PIMI s, interest income on MBS and base interest income on PIMS and PIMI s
will decline. The Trust funds a portion of dividends with principal
collections which will continue to reduce the asset base generating income
for the Trust in the future.
<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 23, 1997
<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>
<CIK> 0000872467
<NAME> KRUPP GOVERNMENT INCOME TRUST-II
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,365,473
<SECURITIES> 267,826,210<F1>
<RECEIVABLES> 1,644,180
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,672,321<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 295,508,184
<CURRENT-LIABILITIES> 1,662,833<F3>
<BONDS> 0
0
0
<COMMON> 294,836,757
<OTHER-SE> (991,406)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 295,508,184
<SALES> 0
<TOTAL-REVENUES> 5,306,978<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,294,362<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,012,616
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,012,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,084,916
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $150,117,411 and Additional Loans of $29,952,351), Partcipating
Insured Mortgages ("PIM's") of $49,529,348 and Mortgage-Backed Securities
("MBS") of $38,227,100.
<F2>Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $4,912,429 and prepaid participating servicing of
$5,494,547 net of accumulated amortization of $1,393,439.
<F3>Includes deferred income on Additional Loans of $1,656,456.
<F4>Unrealized loss on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $534,747 of amortization for prepaid fees and expenses.
</FN>
</TABLE>
