UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
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.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
BALANCE SHEETS
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
<S> <C> <C>
Insured mortgages $144,807,366 $145,537,234
Additional loans 29,152,351 29,152,351
Participating Insured Mortgages ("PIMs")(Note 2) 38,490,431 37,645,082
Mortgage-Backed Securities and multi-family
insured mortgage loan (AMBS")(Note 3) 47,187,093 51,171,301
Total mortgage investments 259,637,241 263,505,968
Cash and cash equivalents 14,871,996 13,520,091
Prepaid acquisition fees and expenses, net of
accumulated amortization of $6,893,351 and
$6,099,180, respectively 9,590,291 10,384,462
Prepaid participation servicing fees, net of
accumulated amortization of $2,115,663 and
$1,858,497, respectively 3,378,884 3,636,050
Interest receivable and other assets 1,935,229 2,111,153
Total assets $289,413,641 $293,157,724
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 2,541,374 $ 2,755,705
Other liabilities 24,070 30,949
Total liabilities 2,565,444 2,786,654
Commitments (Note 2)
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 286,334,599 289,864,327
Unrealized gain on MBS 513,598 506,743
Total Shareholders' equity 286,848,197 290,371,070
Total liabilities and Shareholders' equity $289,413,641 $293,157,724
The accompanying notes are an integral
part of the financial statements.
</TABLE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Revenues:
Interest income - PIMs and
PIMIs:
<S> <C> <C> <C> <C>
Base interest $3,206,385 $3,636,543 $6,343,372 $6,990,634
Additional loan interest 373,763 417,443 885,750 1,028,911
Participation interest 138,559 161,0008 32,913 652,525
Interest income - MBS 821,250 706,558 1,779,542 1,435,740
Interest income - other 237,848 135,766 426,753 256,478
Total revenues 4,777,805 5,057,310 10,268,330 10,364,288
Expenses:
Asset management fee to an
affiliate 485,653 496,278 970,604 1,000,721
Expense reimbursements to
affiliates (35,643) 108,482 72,840 229,392
Amortization of prepaid
expenses and fees 525,669 523,078 1,051,337 1,057,825
General and administrative 136,455 107,007 221,077 241,269
Total expenses 1,112,134 1,234,845 2,315,858 2,529,207
Net income $3,665,671 $3,822,465 $7,952,472 $7,835,081
Earnings per share $ .20 $ .21 $ .43 $ .43
Weighted average shares
outstanding 18,371,477 18,371,477
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
Operating activities:
<S> <C> <C>
Net income $ 7,952,472 $ 7,835,081
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 80,747 49,087
Amortization of prepaid expenses and fees 1,051,337 1,057,825
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 175,924 299,149
Decrease in other liabilities (6,879) (11,045)
Net cash provided by operating activities 9,253,601 9,230,097
Investing activities:
Investment in PIMs and Insured Mortgages (1,003,677) -
Investment in Additional Loans - (465,000)
Principal collections on MBS 3,910,316 2,213,065
Principal collections on PIMs 888,196 888,676
Increase (decrease) in deferred income on
Additional Loans (214,331) 116,765
Net cash provided by investing activities 3,580,504 2,753,506
Financing activity:
Dividends (11,482,200) (11,482,200)
Net increase in cash and cash equivalents 1,351,905 501,403
Cash and cash equivalents, beginning of period 13,520,091 9,214,592
Cash and cash equivalents, end of period $ 14,871,996 $ 9,715,995
</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.
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, 1998, the results of its operations
for the three and six months ended June 30, 1998 and 1997 and its cash
flows for the six months ended June 30, 1998 and 1997. The results of
operations for the three and six months ended June 30, 1998 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, 1998, the Trust's PIMs and PIMIs have a fair value of
$208,866,480 and gross unrealized losses of $3,583,668, respectively.
The PIMs and PIMIs have maturities ranging from 2008 to 2036. At June
30, 1998 there are no insured mortgage loans within the Trust=s
portfolio that are delinquent of principal or interest.
During the second quarter of 1998, the Trust completed the funding of
its commitment on the Fountains PIM.
Windmill Lakes has been adversely affected by a competitive housing
market in its South Florida area. As a result, at March 31, 1998 the
borrower of the Windmill Lakes Additional Loan is in technical default
on its Additional Loan for not making the full required base interest
payments due on the Additional Loan. The Advisor is currently assessing
the feasibility of extending debt service relief to the borrower until
the market stabilizes.
3. MBS
At June 30, 1998, the Trust's MBS portfolio has an amortized cost of
approximately $46,673,495 and gross unrealized gains and losses of
approximately $520,704 and $7,106, respectively. The MBS portfolio has
maturities ranging from 2008 to 2023.
In June 1997, Statement of Financial Accounting Standards No. 130,
'Reporting Comprehensive Income' (FASB 130), was issued establishing
standards for reporting and displaying comprehensive income and its
components effective January 1, 1998. FASB 130 requires comprehensive
income and its components, as recognized under accounting standards, to
be displayed in a financial statement with the same prominence as other
financial statements, if material. FASB 130 had no material effect on
the Trust's financial position or results of operations.
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 six months ended
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain Equity
Balance at
<S> <C> <C> <C> <C>
December 31, 1997 $289,864,327 $ - $ 506,743 $290,371,070
Net income - 7,952,472 - 7,952,472
Dividends (3,529,728) (7,952,472) - (11,482,200)
Change in
unrealized gain
on MBS - - 6,855 6,855
Balance at $286,334,599 $ - $ 513,598 $286,848,197
June 30, 1998
</TABLE>
5. Related Party Transactions
During the three months ended June 30, 1998 and June 30, 1997 the Trust
received $0 and $56,471 of interest income on Additional Loans from an
affiliate of the Advisor. During the six months ended June 30, 1998 and
1997, the Trust received $221,641 and $254,732 of interest income on
Additional Loans from an affiliate of the Advisor. In addition, the
Trust received $68,456 and $0 related to participation interest income
for the six months ended June 30, 1998 and 1997.
<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 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, 1998 the Trust has significant liquidity consisting of cash and
cash equivalents, of approximately $14.9 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 is 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.
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.
The borrower on the St. Germain PIMI is expected to prepay the first mortgage
loan and the Additional Loan on July 31, 1998 as a result of a refinancing of
the property. In addition, to the principal repayments, the Trust will receive
the full, preferred return earned on its investment through the date of the
prepayment as well as its share of the increase in the property's value.
Most of the other properties in the Trust's portfolio generate sufficient
operating revenues to adequately maintain the property, service the debt and pay
participating interest to the Trust. However the operating performance of two
properties located in South Florida, Oasis at Springtree and Windmill Lakes,
continue to be adversely affected by highly competitive housing markets. Low
interest rates and available building sites have encouraged aggressive
development of both single-family homes and new apartment product. The borrower
on the Windmill Lakes PIMI is currently delinquent in his obligation on the
Additional Loan. Although he is trying to sell the property, he has been unable
to secure a purchase offer that will cover the property's outstanding
liabilities. The Advisor is currently assessing the feasibility of extending
debt service relief on Windmill Lakes until that market stabilizes.
The borrower on the Lakes at Vinings and Martins Landing PIMIs sold the
property during July 1998, and the purchaser assumed both the guaranteed first
mortgage loans and the Additional Loans on both properties. However, the
purchaser has requested the Trust to allow it to prepay the Additional Loans.
The Advisor is currently assessing the request.
The borrower on the Windsor Lake PIMI has approached the Trust with a
request to either allow a prepayment of the PIMI at a discount or enter into a
workout agreement that would provide debt service relief. There are significant
repair and replacement issues with Windsor Lake that have begun to have an
effect on the leasing at the property. The Advisor is currently assessing the
borrower's request and expects to respond prior to year-end.
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 Partnership's investments in mortgages are guaranteed or insured by the
FannieMae, the Federal Home Loan Mortgage Corporation (AFHLMC@), and the United
States Department of Housing and Urban Development (AHUD@) 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.
FannieMae is a federally chartered private corporation that guarantees
obligations originated under its programs. However, obligations of FannieMae
are not backed by the U.S. Government. FannieMae 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
FannieMae 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.
The Trust includes in cash and cash equivalents approximately $14 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 and six months ended June 30, 1998 and 1997.
The Trust's net income decreased $157,000 for the three months ended June
30, 1998 as compared to the same period of 1997 due to decreases in PIM and PIMI
base interest of approximately $430,000 and an increase in general and
administrative expenses of approximately $29,000. This was offset by increases
in other interest income and interest income on MBS of approximately $102,000
and $115,000, respectively and a decrease in expense reimbursements of $144,000.
The decrease in base interest on PIMs and PIMIs and the increase in interest
income on MBS for the three months ended June 30, 1998 as compared to the same
period of 1997 are primarily due to two transactions in 1997 involving the
Willows Apartment PIMI and the Estates Apartment PIM. In each of these
transactions the properties were sold and the Participating and Additional Loans
were paid off. However, the buyer assumed the existing first mortgage and the
Trust will continue to receive principal and interest on the portion of the
financing but has now classified it as an MBS. Other interest income also
increased due to the Trust having higher short-term investment balances during
the three months ended June 30, 1998 as compared to the same period of 1997.
During the second quarter of 1998, the Trust received a rebate for expense
reimbursements related to 1997.
The Trust's net income increased $117,000 for the six months ended June 30,
1998 as compared to the same period of 1997. The increase was due to an increase
in interest income on MBS, participation interest and other interest income of
approximately $344,000, $180,000 and $170,000, respectively, and a decline in
expenses of approximately $213,000. This was offset by decreases in base
interest income from PIM and PIMIs of approximately $647,000 and additional loan
interest of approximately $143,000. The increase in participation income is due
to the Trust recognizing the settlement related to The Estates of $232,000 that
was received in 1998. The increase in interest income on MBS and decrease in the
base interest income from PIM and PIMIs is due to the transactions involving the
Willows Apartment PIMI and the Estates Apartment PIM as mentioned above. The
decrease in Additional Loan interest is due to the prepayment of the Willows
Additional Loan during the third quarter of 1997 and no Additional Loan interest
payment from the borrower of the Windmill Lakes PIMI. Other interest income also
increased due to the Trust having higher short-term investment balances during
the six months ended June 30, 1998 when compared to the same period in 1997. The
decrease in expenses is primarily due to lower expenses reimbursements, asset
management fee and general and administrative expenses of approximately $157,000
$30,000 and $20,000, respectively, during the six months ended June 30, 1998 as
compared to the same period in 1997.
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 assets of the Trust thereby reducing the
income, generated by 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: July 31, 1998
<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> Jun-30-1998
<PERIOD-END> Jun-30-1998
<CASH> 14,871,993
<SECURITIES> 259,637,241<F1>
<RECEIVABLES> 1,935,229
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,969,175<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 289,413,641
<CURRENT-LIABILITIES> 2,541,374<F3>
<BONDS> 0
0
0
<COMMON> 286,334,599
<OTHER-SE> 513,598<F4>
<TOTAL-LIABILITY-AND-EQUITY> 289,413,641
<SALES> 0
<TOTAL-REVENUES> 10,268,330<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,315,858<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,952,472
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,952,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,952,472
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Participating Insured Mortgage Investments ("PIMIs")(insured
mortgages of $144,807,366 and Additional Loans of $29,152,351), Participating
Insured Mortgages("PIMs")of $38,490,431 and Mortgage-backed Securities
("MBS") of $47,187,093.
<F2> Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $6,893,351 and prepaid participation servicing fees
of $5,494,547 net of accumulated amortization of $2,115,663.
<F3> Includes deferred income on Additional Loans of $2,541,374.
<F4> Unrealized gain on MBS.
<F5> Represents interest income on investments in mortgages and cash.
<F6> Includes $1,051,337 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
