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 September 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
<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
BALANCE SHEETS
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
<S>
Participating Insured Mortgages Investments ("PIMIs") <C> <C>
Insured mortgages (Note 2) $133,461,199 $145,537,234
Additional loans (Note 2) 26,292,351 29,152,351
Participating Insured Mortgages ("PIMs")(Note 2) 38,411,591 37,645,082
Mortgage-Backed Securities and multi family
insured mortgage loan ("MBS")(Note 3) 45,348,109 51,171,301
Total mortgage investments 243,513,250 263,505,968
Cash and cash equivalents 16,999,123 13,520,091
Prepaid acquisition fees and expenses,
net of accumulated amortization of
$7,822,766 and $6,099,180 8,660,876 10,384,462
Prepaid participation servicing fees,
net of accumulated amortization of
$2,550,732 and $1,858,497 2,943,815 3,636,050
Interest receivable and other assets 1,449,718 2,111,153
Total assets $273,566,782 $293,157,724
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans $ 2,603,811 $ 2,755,705
Other liabilities 33,820 30,949
Total liabilities 2,637,632 2,786,654
Shareholders' equity: (Note 4)
Common Stock, no par value; 25,000,000 shares
authorized and 18,371,477 shares outstanding 269,639,177 289,864,327
Unrealized gain on MBS 1,289,974 506,743
Total Shareholders' equity 270,929,151 290,371,070
Total liabilities and Shareholders'
equity $273,566,782 $293,157,724
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Revenues:
<S>
Interest income - PIMs and PIMIs: <C> <C> <C> <C>
Base interest $3,088,808 $3,483,530 $ 9,432,180 $10,474,164
Additional loan interest 562,037 693,294 1,447,787 1,722,205
Participation interest 2,274,849 1,067,176 3,107,762 1,719,701
Interest income - MBS 762,244 676,796 2,541,786 2,112,536
Interest income - other 367,228 151,969 793,981 408,447
Total revenues 7,055,166 6,072,765 17,323,496 16,437,053
Expenses:
Asset management fee to
an affiliate 465,670 503,256 1,436,274 1,503,977
Expense reimbursements to
affiliates 77,358 108,482 150,198 337,874
Amortization of prepaid expenses
and fees 1,364,484 599,818 2,415,821 1,657,643
General and administrative 118,793 72,942 339,870 314,211
Total expenses 2,026,305 1,284,498 4,342,163 3,813,705
Net income 5,028,861 4,788,267 12,981,333 12,623,348
Net change in unrealized gain
on MBS 776,376 420,505 783,231 209,627
Total comprehensive income $5,805,237 $5,208,772 $13,764,564 $12,832,975
Earnings per share $ .27 $ .26 $ .70 $ .69
Weighted average shares
outstanding 18,371,477 18,371,477
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
Operating activities:
<S> <C> <C>
Net income $12,981,333 $ 12,623,348
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 136,519 82,087
Amortization of prepaid expenses and fees 2,415,821 1,657,643
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 661,435 415,689
Increase (decrease) in other liabilities 2,871 (4,049)
Net cash provided by operating activities 16,197,979 14,774,718
Investing activities:
Investment in PIMs (1,003,677) -
Investment in Additional Loan - (465,000)
Prepayment of Additional Loan 2,860,000 1,265,000
Principal collections on MBS 6,469,904 3,328,820
Principal collections on PIMs and Insured
mortgages 12,313,203 1,344,342
Increase (decrease) in deferred income on
Additional Loans (151,894) 674,919
Net cash provided by investing activities 20,487,536 6,148,081
Financing activity:
Dividends (33,206,483) (17,223,299)
Net increase in cash and cash equivalents 3,479,032 3,699,500
Cash and cash equivalents, beginning of period 13,520,091 9,214,592
Cash and cash equivalents, end of period $16,999,123 $ 12,914,092
Supplemental disclosure of non-cash
investing activities:
Reclassification of investment in a
PIMI to an MBS $ - $ 3,515,288
</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,
1997 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, 1998, its results of
operations for the three and nine months ended September 30, 1998 and
1997, and its cash flows for the nine months ended September 30, 1998
and 1997.
The results of operations for the three and nine months ended September
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 September 30, 1998, the Trust's PIMs and PIMIs have a fair
value of $192,001,903 and gross unrealized losses of $3,559,427,
respectively. The PIMs and PIMIs have maturities ranging from 2008 to
2036. At September 30, 1998 there are no insured mortgage loans within
the Trust's portfolio that are delinquent of principal or interest.
On July 31, 1998 and on August 25, 1998, the Trust received the
prepayments of the St. Germain Additional Loan of $2,860,000 and the
related FNMA MBS with a remaining principal balance of $11,006,015,
respectively. In addition, the Trust received Participation Interest
as follows: (i) Additional Loan interest payable through the date of
sale of $83,417, (ii) Contingent Interest payable through the date of
sale of $89,975, (iii) Participating Appreciation Interest of
$1,874,032. On October 9, 1998, the Trust received Participating Income
Interest payable through the date of sale attributable to 1998
property operations of $94,258. On September 28, 1998, the Trust made
a special dividend of $.87 per share to its Shareholders.
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, since March 31, 1998
the borrower of the Windmill Lakes Additional Loan has been 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.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At September 30, 1998, the Trust's MBS portfolio has an amortized
cost of $44,058,135 and gross unrealized gains of $1,289,974. 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. Accordingly, unrealized
gains (losses) on the Trust's available-for sale securities have been
included in other comprehensive income.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for the nine months ended
September 30, 1998 is as follows:
<TABLE>
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 - 12,981,333 - 12,981,333
Dividends (20,225,150) (12,981,333) - (33,206,483)
Change in unrealized
gain on MBS - - 783,231 783,231
Balance at
September 30, 1998 $269,639,177 $ - $ 1,289,974 $270,929,151
</TABLE>
5. Related Party Transactions
During the three months ended September 30, 1998 and 1997 the Trust
earned $221,641 and $221,641 respectively, of interest income on the
Additional Loan from an affiliate of the Advisor. During the three
months ended September 30, 1998 and 1997, the Trust received and
deferred $0 and $547,357, respectively, of interest payments on the
Additional Loan from an affiliate of the Advisor.
During the nine months ended September 30, 1998 and 1997 the Trust
earned $443,282 and $419,901, respectively, of interest income on the
Additional Loan from an affiliate of the Advisor. During the nine
months ended September 30, 1998 and 1997, the Trust received and
deferred $0 and $603,828, respectively, of interest payments on the
Additional Loan from an affiliate of the Advisor.
In addition, the Trust received $170,652 and $83,360 from an affiliate
related to Participating Interest Income for the three months ended
September 30, 1998 and 1997. The Trust also received $239,107 and
$83,360 from an affiliate related to Participating Interest Income
for the nine months ended September 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 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.
The Advisor of the Trust has conducted an assessment of the Trust's core
internal and external computer information systems and has taken the further
necessary steps to understand the nature and extent of the work required to
make its systems Year 2000 ready in those situations in which it is required
to do so. The Year 2000 readiness issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions
of operations. The Year 2000 issue affects virtually all companies and all
organizations.
In this regard, the Advisor of the Trust, along with certain affiliates,
began a computer systems project in 1997 to significantly upgrade its existing
hardware and software. The Advisor completed the testing and conversion of the
financial accounting operating systems in February 1998. As a result, the
Advisor has generated operating efficiencies and believes its financial
accounting operating systems are Year 2000 ready. The Trust incurred hardware
costs as well as consulting and other expenses related to the infrastructure
and facilities enhancements necessary to complete the upgrade and prepare
for the Year 2000. There are no other systems or software that the Trust is
using at the present time.
The Advisor of the Trust is in the process of evaluating the potential adverse
impact that could result from the failure of material third-party service
providers (including but not limited to its banks and telecommunications
providers) and significant vendors to be Year 2000 ready. No estimate can be
made at this time as to the impact of the readiness of such third parties.
Liquidity and Capital Resources
At September 30, 1998 the Trust has significant liquidity consisting of cash
and cash equivalents, of approximately $17 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.
As a result of the St. Germain payoff the Trust made a special dividend of
$.87 per share from the payoff proceeds. Consequently, the Trust's capital
resources and its future cash flows will be lower. However, at this time the
Advisor has determined that the Trust can maintain its current dividend rate
of $1.25 per share per year. 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 Lakes at Vinings and Martins Landing PIMIs sold these
properties during July 1998, and the purchaser assumed both the guaranteed
first mortgage loans and the Additional Loans on both properties.
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 will have a long-term effect on
the value of the property. The Advisor is currently assessing the borrower's
request and expects to respond prior to year-end.
Also 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. All 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.
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 Fannie Mae, 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.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. However, obligations of Fannie Mae
are not backed by the U.S. Government. Fannie Mae 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 Fannie
Mae 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 $16.6 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 nine months ended September 30, 1998 and 1997.
The Trust's net income increased for the three and nine months ended September
30, 1998 as compared to the same periods in 1997. The increases were due to
increases in interest income on MBS, participation interest and interest
income on cash and cash equivalents and decreases in expense reimbursements
and asset management fees. This was offset by decreases in base interest income
from PIMs and PIMIs and additional loan interest and increases in amortization
and general and administrative expenses. The increase in interest income on
MBS is 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 this portion of the financing
but the Trust has now classified it as an MBS. The increase in participation
interest is due to the Trust receiving participation interest related to
prepayment of the St. Germain PIMI and also the Trust recognizing the settlement
related to The Estates that was received in 1998. Interest income on cash and
cash equivalents also increased due to the Trust having higher short-term
investment balances during the three and nine months ended September 30, 1998
when compared to the same period in 1997. The decrease in expense reimbursements
when comparing 1998 to 1997 is due to the Trust having received a rebate for
expense reimbursements related to 1997. The decrease in asset management fees
when comparing 1998 to 1997 is a result of the Trust's asset base declining.
The decrease in base interest on PIMs and PIMIs is due to two transactions in
1997 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. The increase in amortization expense is because the Trust fully
amortized the remaining balance of the prepaid fees and expenses associated
with the St. Germain PIMI.
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
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, 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> 9-MOS
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-END> Sep-30-1998
<CASH> 16,999,123
<SECURITIES> 243,513,520<F1>
<RECEIVABLES> 1,449,718
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,604,691<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 273,566,782
<CURRENT-LIABILITIES> 2,637,632<F3>
<BONDS> 0
0
0
<COMMON> 269,639,177
<OTHER-SE> 1,289,974<F4>
<TOTAL-LIABILITY-AND-EQUITY> 273,566,782
<SALES> 0
<TOTAL-REVENUES> 17,323,496<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,342,163<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,981,333
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,981,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,981,333
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $133,461,199 and Additional Loans of $26,292,351(, Participating
Insured Mortgages ("PIMs") of $38,411,591 and Mortgage-backed Securities ("MBS")
of $45,348,109.
<F2>Includes prepaid acquisition fees and expenses of $16,483,642 net of
accumulated amortization of $7,822,766 and prepaid participation servicing fees
of $5,494,547 net of accumulated amortization of $2,550,732.
<F3>Includes deferred income on Additional Loans of $2,603,811.
<F4>Unrealized gain on MBS.
<F5>Represents interest income on investments in mortgages and cash.
<F6>Includes $2,415,821 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
