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 September 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.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
<CAPTION>
BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
<S>
Participating Insured Mortgages Investments ("PIMIs")
<S> <C> <C>
Insured mortgages(Note 2) $145,891,556 $150,454,030
Additional loans(Note 2) 29,152,351 29,952,351
Participating Insured Mortgages ("PIMs")(Note 2) 49,325,181 49,622,337
Mortgage-Backed Securities and multi family
insured mortgage loan("MBS")(Note 3) 40,895,658 40,581,650
Total mortgage investments 265,264,746 270,610,368
Cash and cash equivalents (Note 2) 12,914,092 9,214,592
Prepaid acquisition fees and expenses,
net of accumulated amortization of $5,702,094
and $4,510,838 10,781,548 11,972,804
Prepaid participation servicing fees,
net of accumulated amortization of $1,726,670
and $1,260,283 3,767,877 4,234,264
Interest receivable and other assets 1,848,998 2,264,687
Total assets $294,577,261 $298,296,715
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 2,256,973 $ 1,582,054
Other liabilities 23,036 27,085
Total liabilities 2,280,009 1,609,139
Commitments (Note 2)
Shareholders' equity: (Note 4)
Common Stock, no par value; 25,000,000 shares
authorized and 18,371,477 shares outstanding 291,965,290 296,565,241
Unrealized gain on MBS 331,962 122,335
Total Shareholders' equity 292,297,252 296,687,576
Total liabilities and Shareholders'
equity $294,577,261 $298,296,715
The accompanying notes are an integral
part of the financial statements.
</TABLE>
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<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
<CAPTION>
STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S>
Revenues:
Interest income - PIMs and PIMIs:
<S> <C> <C> <C> <C>
Base interest $3,483,530 $3,465,244 $ 10,474,164 $ 10,443,989
Additional loan interest 693,294 380,495 1,722,205 1,141,485
Participation interest 1,067,176 212,316 1,719,701 692 298
Interest income - MBS 676,796 764,253 2,112,536 2,379,465
Interest income - other 151,969 113,122 408,447 396,663
Total revenues 6,072,765 4,935,430 16,437,053 15,053,900
Expenses:
Asset management fee to
an affiliate 503,256 515,109 1,503,977 1,545,307
Expense reimbursements to
affiliates 108,482 122,480 337,874 341,394
Amortization of prepaid expenses,
fees and organization costs 599,818 528,565 1,657,643 1,561,256
General and administrative 72,942 63,099 314,211 259,529
Total expenses 1,284,498 1,229,253 3,813,705 3,707,486
Net income $4,788,267 $3,706,177 $ 12,623,348 $11,346,414
Earnings per share $ .26 $ .20 $ .69 $ .62
Weighted average shares
outstanding 18,371,477 18,371,477
</TABLE>
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<PAGE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
1997 1996
<S>
Operating activities:
<S> <C> <C>
Net income $ 12,623,348 $11,346,414
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 82,087 135,898
Amortization of prepaid expenses and fees
and organization costs 1,657,643 1,561,256
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 415,689 243,472
Increase (decrease) in other liabilities (4,049) (1,206)
Net cash provided by operating
activities 14,774,718 13,285,834
Investing activities:
Investment in PIMs and Insured Mortgages - (5,615,879)
Investment in Additional Loans (465,000) -
Investment in MBS - (591,600)
Prepayment of additional loan including
participating appreciation interest 1,265,000 -
Principal collections on MBS 3,328,820 5,902,024
Principal collections on PIMs 1,344,342 1,209,978
Increase in deferred income on Additional
Loans 674,919 582,355
Net cash provided by investing activities 6,148,081 1,486,878
Financing activity:
Dividends (17,223,299) (17,223,301)
Net increase (decrease)in cash and
cash equivalents 3,699,500 (2,450,589)
Cash and cash equivalents, beginning of period 9,214,592 11,675,494
Cash and cash equivalents, end of period $ 12,914,092 $ 9,224,905
Supplemental disclosure of non-cash
investing activities:
Reclassification of investment in a
PIMI to an MBS $ 3,515,288 $ -
</TABLE>
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<PAGE>
The accompanying notes are an integral
part of the financial statements.
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 a 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 only normal recurring accruals) necessary to fairly
present the Trust's financial position as of September 30, 1997, its
results of operations for the three and nine months ended September
30, 1997 and 1996, and its cash flows for the nine months ended
September 30, 1997 and 1996.
The results of operations for the three and nine months ended
September 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 1997, the Trust advanced an additional
$465,000 to the owner of the Willows Apartments, increasing the
Additional Loan to $1,265,000. During the third quarter of 1997, as
a result of a sale of the property to a third party, the Trust
accepted a full payoff of the $1,265,000 Additional Loan and received
all of its Preferred Interest of $302,520 that was earned as of the
date of the sale. In conjunction with the payoff of the Additional
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<PAGE>
Loan, the Trust converted the investment from a PIMI to an insured
mortgage and fully amortized the deferred mortgage costs associated
with the Additional Loan.
At September, 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, PIMs and insured mortgages.
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At September 30, 1997, the Trust's MBS portfolio has an amortized
cost of $40,563,696 and gross unrealized gains and losses of
approximately $481,570 and $149,608. The MBS portfolio has
maturities ranging from 2008 to 2023.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for the nine months ended
September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain (Loss) Equity
<S>
Balance at December 31,
<S> <C> <C> <C> <C>
1996 $296,565,241 $ - $122,335 $296,687,576
Net income - 12,623,348 - 12,623,348
Dividends (4,599,951) (12,623,348) - (17,223,299)
Change in unrealized
gain on MBS - - 209,627 209,627
Balance at
September 30, 1997 $291,965,290 $ - $ 331,962 $292,297,252
</TABLE>
5. Related Party Transactions
During the three and nine months ended September 30, 1997, the
Trust earned $852,357 and $1,107,089, respectively, of interest
payments on Additional Loans with an affiliate of the Advisor,
as compared to $147,761 and $295,522, respectively, during the
three and nine months ended September 30, 1996.
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<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
maydiffer materially from those anticipated by such forward-looking
statements.
Liquidity and Capital Resources
At September 30, 1997 the Trust has significant liquidity consisting of
cash and cash equivalents, of approximately $12.9 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 quarterlydividends
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 owner of the Willows Apartments increasing the Additional Loan
amount to $1,265,000. Subsequent to the funding, the owner notified the
Trust of its intention to sell the property to a third party during the
third quarter. During the third quarter of 1997, the Trust received the
prepayment of the Additional Loan of $1,265,000 and the payment of$789,336
which represents all of the Preferred Interest due on the Trust s
investment through the date of sale. In addition the Trust allowed the
purchaser to assume the first mortgage. The Trust converted the Willows
Apartment PIMI to an insured mortgage.
Windmill Lakes operating performance during the third quarter continued to
be adversely affected by the highly competitive housing market in Pembroke
Pines, Florida. New construction in all housing sectors is being fueledby
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 borrower has informed the Advisor that
the property is being marketed for sale. Should the borrower be unable to
obtain a purchase offer adequate to cover the property s outstanding
liabilities, the Advisor anticipates that some measure of debt service
relief will be necessary until the market stabilizes. The Advisor
continues to monitor this property closely.
The borrower on the Estate PIM has informed the Advisor that a sale of the
property is pending to one of the Trust s affiliated entities. To
facilitate the sale transaction, the borrower asked and the Advisor agreed
to release the participation features of the PIM and allow the purchaser
to assume the obligations of the first mortgage loan. In exchange for
this modification, the Advisor will require the borrower to pay a
settlement that will provide the Trust a financial return that will be
comparable to what the Trust would have expected to receive had the
borrower continued to own the property. The PIM will convert to an
insured mortgage when the transaction is completed.
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<PAGE>
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
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, with the exception of the
Additional Loans, are guaranteed or insured by the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), and the Department of Housing and Urban Development ("HUD"),
and therefore, the certainty of the 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
conventional real estate lending, 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
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<PAGE>
The following discussion relates to the operations of the Trust during
the three and nine months ended September 30, 1997 and 1996.
The Trust s net income increased significantly during the third quarter
of 1997 as compared to the third quarter of 1996 due to increases in
participation interest and additional loan interest of $854,860 and
$312,799. 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 increase in participation interest is
attributable to the Trust receiving a preferred return of $789,336
related to the prepayment of the Willows Additional Loan as well as
participation income from The Seasons, Sunset Summit, The Lakes, Martin s
Landing, Windsor Lake and Oasis at Springtree of $83,360, $60,000,
$57,728, $40,495, $28,194 and $8,064. This was offset by decreases in
MBS interest of $87,457.
The Trust s net income increased significantly during the nine months
ended September 30, 1997 as compared to the nine months ended September
30, 1996 due to increases in additional loan interest and participation
interest of $580,720 and $1,027,403, 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
increase in participation interest is attributable to the Trust receiving
a preferred return of $789,336 related to the prepayment of the Willows
Additional Loan as well as participation income from St. Germain, The
Lakes, Martins Landing, The Seasons, Oasis at Springtree, Windsor Lakes,
Mequon Trail, Sunset Summit, Crossing Village and The Willows Apartments
of $228,313, $185,560, $94,704, $83,360, $80,670, $80,652, $72,105,
$60,000, $25,000 and $20,000, respectively. This was offset by a decrease
in MBS interest of $266,929 and increases in general and administration
and amortization expenses of $54,682 and $96,387, respectively. As
principal collections reduce the Trust s investments in MBS, PIMs and
PIMIs , interest income on MBS and base interest income on PIMs and PIMIs
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.
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<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: October 28, 1997
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<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 it's entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000872467
<NAME> KRUPP GOVERNMENT INCOME TRUST-II
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,914,092
<SECURITIES> 265,264,746<F1>
<RECEIVABLES> 1,848,998
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,549,425<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 294,577,261
<CURRENT-LIABILITIES> 2,280,009<F3>
<BONDS> 0
0
0
<COMMON> 291,965,290
<OTHER-SE> 331,962<F4>
<TOTAL-LIABILITY-AND-EQUITY> 294,577,261
<SALES> 0
<TOTAL-REVENUES> 16,437,053<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,813,705<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,623,348
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,623,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,623,348
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMI's") (insured
mortgages of $145,891,556 and Additional Loans of $29,152,351), Participating
Insured Mortgages ("PIMs") of $49,325,181 and Mortgage-backed Securities
("MBS") of $40,895,658.
<F2>Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $5,702,094 and prepaid participation servcing fees
of $5,494,547 net of accumulated amortization of $1,726,670.
<F3>Includes deferred income on Additional Loans of $2,256,973.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $1,657,673 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
