UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-20164
Krupp Government Income Trust II
(Exact name of registrant as specified in its charter)
Massachusetts 04-3073045
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 523-0066
Securities registered pursuant to Section 12(b) of the Act:
Title Name of Exchange on which Registered
Shares of Beneficial Interest None
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Aggregate market value of voting securities held by non-affiliates: Not
applicable.
Documents incorporated by reference: see Part IV, Item 14
The exhibit index is located on pages 13-20.
<PAGE>
PART I
This Form 10-K 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.
ITEM 1. BUSINESS
Krupp Government Income Trust II (the "Trust") is a Massachusetts business
trust which was formed on February 8, 1991 and is authorized to sell up to
25,000,000 shares of beneficial interest (the "Shares"). Berkshire Realty
Advisors Limited Partnership acquired 10,000 of such Shares and 18,315,158
Shares were sold under the Trust's public offering for $365,686,058 net of
purchase volume discounts of $617,102. On December 29, 1994, Berkshire Mortgage
Advisors Limited Partnership acquired Berkshire Realty Advisors Limited
Partnership's 10,000 shares and assumed the role of the Advisor to the Trust.
Under the Dividend Reinvestment Plan ("DRP"), 46,319 Shares were sold for
$880,061 (the remaining 6,572,204 Shares are available for general Trust
purposes). See Note A of Notes to Financial Statements included in Appendix A of
this report for additional information. The Trust has utilized the net proceeds
from the public offering to acquire participating insured mortgages ("PIMs"),
participating insured mortgage investments ("PIMIs") and mortgage-backed
securities ("MBS"). The Trust considers itself to be engaged in only one
industry segment, investment in mortgages.
The Trust has elected to be treated as a real estate investment trust
("REIT"), under the Internal Revenue Code of 1986, as amended. The Trust shall
terminate on December 31, 2030, unless earlier terminated by the affirmative
vote of holders of a majority of the outstanding shares entitled to vote
thereon. See Note A of Notes to Financial Statements included in Appendix A of
this report for additional information.
The Trust's investments in PIMs on multi-family residential properties
consist of a MBS or an insured mortgage loan (collectively, the "insured
mortgage") guaranteed or insured as to principal and basic interest and a
participation interest. The insured mortgages were issued or originated under or
in connection with the housing programs of Fannie Mae or the Federal Housing
Administration ("FHA") under the authority of the Department of Housing and
Urban Development ("HUD"). PIMs provide the Trust with monthly payments of
principal and basic interest and may also provide for Trust participation in the
current revenue stream and in the residual value, if any, from a sale or other
realization of the underlying property. The borrower conveys these rights to the
Trust through a subordinated promissory note and mortgage. The participation
features are neither insured nor guaranteed.
The PIMIs consist of an insured mortgage, as discussed above, and an
additional loan ("Additional Loan") to the borrower or owners of the borrower in
excess of mortgage amounts insured or guaranteed under GNMA, Fannie Mae or FHA
programs that increases the Trust's total financing with respect to that
property and participation in cash generated by property operations and any
appreciation in the value of the property. The participation features related to
all PIMIs are neither insured nor guaranteed. Additional Loans associated with
insured mortgages issued or originated under or in connection with HUD cannot,
under government regulations, be collateralized by a mortgage on the underlying
property. These Additional Loans are typically collateralized with collateral
satisfactory to the Advisor, but are neither insured nor guaranteed. Additional
Loans associated with FNMA insured mortgages are collateralized by a
subordinated mortgage on the underlying property. The borrower conveys these
rights to the Trust through a subordinated loan agreement. Under the Additional
Loans, the Trust receives semi-annual interest payments and a Preferred Return
representing a non-compounded cumulative return on the outstanding indebtedness,
usually the aggregate amount of the insured mortgage and Additional Loan.
The Trust also acquired MBS collateralized by single-family mortgage loans
issued or originated by Fannie Mae or the Federal Home Loan Mortgage Corporation
("FHLMC"). Fannie Mae and FHLMC guarantee the principal and interest of the
Fannie Mae and FHLMC MBS, respectively.
The Trust will distribute any and all proceeds from prepayments or other
realizations of mortgage assets to investors either through quarterly
distributions or possibly special distributions.
Although the Trust will terminate no later than December 31, 2030, the value
of the PIMIs and PIMs may be realized by the Trust through repayment or sale as
early as ten years from the dates of the closings of the permanent loans, and
the Trust may realize the value of all of its other investments within that time
frame thereby resulting in a dissolution of the Trust significantly prior to
December 31, 2030.
The requirements for compliance with federal, state and local regulations to
date have not had an adverse effect on the Trust's operations, and the Trust
anticipates no adverse effect in the future.
To qualify as a REIT for federal income tax purposes, the Trust made a valid
election to be so treated and must continue to satisfy a range of complex
requirements including criteria related to its ownership structure, the nature
of its assets, the sources of its income and the amount of its distributions to
shareholders. The Trust intends to qualify as a REIT in each year of operation,
however, certain factors may have an adverse effect on the Trust's REIT status.
If for any taxable year, the Trustees and the Advisor determine that any of the
asset, income, or distribution tests are not likely to be satisfied, the Trust
may be required to borrow money, dispose of mortgages or take other action to
avoid loss of REIT status.
Additionally, if the Trust does not qualify as a REIT for any taxable year,
it will be subject to federal income tax as if it were a corporation and the
shareholders will be taxed as shareholders of a corporation. If the Trust were
taxed as a corporation, the payment of such tax by the Trust would substantially
reduce the funds available for distribution to shareholders or for reinvestment.
To the extent that distributions had been made in anticipation of the Trust's
qualification as a REIT, the Trust might be required to borrow additional funds
or to liquidate certain of its investments in order to pay the applicable tax.
Moreover, should the Trust's election to be taxed as a REIT be terminated or
voluntarily revoked, the Trust may not be able to elect to be treated as a REIT
for the following five-year period.
As of December 31, 1998, there were no personnel directly employed by the
Trust.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Trust is a party
or to which any of its investments are subject to.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Currently there is no established public trading market for the Shares.
The number of investors holding Shares as of December 31, 1998 was
approximately 15,500.
The Trust has and intends to continue to declare and pay dividends on a
quarterly basis. The Trustees established a dividend rate per Share per quarter
of $.3125 for 1998 and 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Trust's financial position and operating results. This information should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and
Supplementary Data, which are included in Item 7 and Item 8, Appendix A of this
report, respectively.
<TABLE>
<CAPTION>
(Amounts in thousands, except for per Share amounts)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total revenues $ 21,630 $ 21,291 $ 19,877 $ 20,033 $ 18,200
Net income $ 13,183 $ 16,263 $ 14,999 $ 13,747 $ 13,882
Net income per Share $ .72 $ .89 $ .82 $ .75 $ .76
Weighted average Shares
outstanding 18,371 18,371 18,371 18,371 18,371
Total assets at December 31 $267,410 $293,158 $298,297 $306,965 $314,250
Average dividends per Share $ 2.12 $ 1.25 $ 1.25 $ 1.25 $ 1.25
</TABLE>
ITEM 7. 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 conducted an assessment of the Trust's core
internal and external computer information systems and has taken the 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 Advisor of 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 significant internal 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. The Trust is in the
process of surveying these third party providers and assessing their readiness
with year 2000. To date, the Trust is not aware of any problems that would
materially impact its results of operations, liquidity or capital resources.
However, the Trust has not yet obtained all written assurances that these
providers would be Year 2000 ready.
The Trust currently does not have a contingency plan in the event of a
particular provider or system not being Year 2000 ready. Such plan will be
developed if it becomes clear that a provider is not going to achieve its
scheduled readiness objectives by June 30, 1999. The inability of one of these
providers to complete its Year 2000 resolution process could impact the Trust.
In addition, the Trust is also subject to external forces that might generally
affect industry and commerce, such as utility and transportation company Year
2000 readiness failures and related service interruptions. To date, The Trust
has not incurred any cost associated with being Year 2000 ready. All costs have
been incurred by the Advisor and it is estimated that any future Year 2000
readiness costs will be borne by the Advisor. No estimate can be made at this
time as to the impact of the readiness of such third parties.
Liquidity and Capital Resources
At December 31, 1998 the Trust had significant liquidity consisting of cash and
cash equivalents of approximately $18 million as well as the cash inflows
provided by its investments in PIMs, PIMIs and MBS. The Trust anticipates that
these sources will be adequate to provide the Trust with sufficient liquidity to
meet its obligations as well as to provide dividends to its investors.
The most significant demand on the Trust's liquidity is dividends paid to
investors, approximately $5.7 million per quarter. The Trust currently has an
annual dividend rate of $1.25 per share, paid in quarterly installments of
$.3125 per share. Funds for the dividends distributed by the Trust come from the
principal and interest payments on the PIMs, PIMIs and MBS, the principal
repayments of the PIMs, PIMIs and MBS, and the interest earned on the Trust's
cash and cash equivalents. The portion of dividends attributable to the
principal collected in those payments reduces the capital resources of the
Trust. As the capital resources of the Trust decrease, the total cash flows to
the Trust will decrease and over time will result in periodic adjustments
to the dividends paid to investors.
The Advisor 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 adjust the dividend rate or distribute such
funds through a special distribution.
In addition to providing guaranteed or insured monthly principal and interest
payments, the Trust's investments in the PIMs and PIMIs also may provide
additional income through the interest on the Additional Loan portion of the
PIMIs as well as a participation interest in the operating cash flow and
increase in the value realized upon the sale or refinance of the underlying
properties. However, these payments are neither guaranteed nor insured and
depend on the successful operations of the underlying properties.
Most of the properties had stable operating results during 1998. High occupancy
rates were maintained and moderate rental rate increases were achieved at more
than half of the properties due to stable or improving markets or the unique
character of the specific property. However, six properties are being closely
monitored by the Advisor and warrant mention. The borrowers on the Norumbega
Point and Oasis PIMIs used out-of-pocket funds to keep those Additional Loans
current during 1998. Norumbega Point generated sufficient operating cash flow
but was unable to use it for Additional Loan interest due to restrictions
imposed by HUD on cash flow distributions, and Oasis did not generate sufficient
cash flow from operations to pay the Additional Loan interest. The borrower on
the Windmill Lakes PIMI is in technical default for non-payment of his
contractual share of the Additional Loan interest.
The operating performance of Oasis and Windmill Lakes declined more seriously
during 1998. Both properties are located in Broward County, Florida and continue
to be adversely affected by the highly competitive market there. As a result
both borrowers have sought debt service relief. The strength of the South
Florida economy, bolstered by an expanding business environment and in-migration
coupled with low interest rates and available building sites, has encouraged
aggressive development of both single-family homes and new apartments. Oasis is
located in the Sunrise submarket, an established market that has seen some major
rehab activity as well as new infill construction in the multifamily sector.
Occupancy at Oasis has remained stable over the past three years in the low 90%
range, however occupancy has become increasingly more expensive to achieve.
Because Oasis must compete with newer or rehabilitated properties, maintenance
costs have risen as the standards apartment communities are judged by continue
to rise. However, as an older property, Oasis has not been able to command the
commensurate rental rate increases it needs to be able to pay for improvements
that will enhance its appeal in the market. Consequently, the Advisor has
tentatively agreed to defer the Additional Loan interest payments for 1999 to
free up funds for some major capital projects. As a result of the factors
described above, in December 1998, management determined that the additional
loan collateralized by the Oasis asset was impaired. As a result the Trust
recorded a valuation allowance of $994,000 in the fourth quarter of 1998.
Windmill Lakes is located in the Pembroke Pines submarket, a market that had
vast tracts of vacant land three years ago and has seen explosive construction
activity since then in the single-family, multifamily and retail sectors.
Windmill Lakes is a ten-year old, basic apartment community that has not been
able to compete against the influx of new apartment communities that are loaded
with amenities. Builders use deep marketing concessions to fill the new
properties, lowering the cost of renting a new apartment and making it more
difficult for older properties like Windmill Lakes to attract residents.
Occupancy at year-end had fallen below 80%. The property's curb appeal, a
critical element in a competitive market, has suffered as well because there has
not been enough cash flow for adequate maintenance. Consequently, due to lack of
cash flow, the borrower is delinquent in his obligation to pay Additional Loan
interest. Although he is trying to sell the property, the borrower has been
unable to secure a purchase price that will cover the property's outstanding
liabilities. The Advisor has agreed to defer the delinquent and 1999 Additional
Loan interest payments pending a sale of the property during 1999. If it becomes
apparent that a sale mutually acceptable to both the Trust and the borrower will
not be possible, the Advisor will reassess the feasibility of extending
long-term debt service relief rather than risk the consequences of a default on
the guaranteed first mortgage. As a result of the factors described above, in
December 1998, management determined that the additional loan collateralized by
the Windmill Lakes asset was impaired. As a result the Trust recorded a
valuation allowance of $2,000,000 in the fourth quarter of 1998.
Rivergreens and Mill Pond, while generating sufficient operating revenues to
service debt obligations and adequately maintain the properties, face
increasingly challenging market conditions that have affected occupancy.
Rivergreens is located in a submarket that typically lags behind the rest of the
Portland, Oregon market, which has been affected by the Asian financial crisis
and Boeing's downsizing. Occupancy at year-end was in the 90% range. Mill Pond,
located in Dayton, Ohio, also has experienced the effects of a soft market
created by new multifamily construction, which creates more competition, and
continuing low interest rates, which shrinks the population of potential renters
as they purchase homes. Occupancy fluctuated during the year, but reached a low
point in the low 80% range at year-end.
The borrower on the Windsor Lake PIMI asked the Trust to either allow a
prepayment of the PIMI at a discount or to enter into a workout agreement that
would provide debt service relief. There are significant repair and replacement
issues at the property that will have a long-term effect on its value. During
the fourth quarter 1998, the Advisor proposed some relief on the Additional Loan
in return for an increase in the Trust's participation in the property's value.
However, there has been no response from the borrower.
Whether the operating performance of any of the properties mentioned above
provide sufficient cash flow from operations to pay either the Additional Loan
interest or participation income will depend on factors that the Trust has
little or no control over. Should the properties be unable to generate
sufficient cash flow to pay the Additional Loan interest, it would reduce the
Trust's distributable cash flow and could affect the value of the Additional
Interest collateral.
During 1998, the Trust received the full Additional Loan interest payments from
ten of its eleven PIMI investments. Eight properties made the scheduled
Additional Loan interest payments with operating cash flow. During 1998, the
Trust received participation income from nine of its investments totalling
$1,056,000. Two of the Trust's PIM investments generated operating cash flow
that exceeded the criteria: Mequon paid $73,254 and Mill Pond paid $21,714.
Seven of the Trust's PIMI investments generated operating cash flow that
exceeded that criteria: Crossings Village paid $150,000; Lakes at Vinings paid
$60,534; Martins Landing paid $50,577; St. Germain paid $359,311; The Seasons
paid $239,107; Windsor Lake paid $83,781; and The Willows paid $17,734. As a
result of continuing strong operating performance in 1998, the Advisor expects
that most of these same properties will pay participation income to the Trust
again in 1999.
During 1998, the Trust received the prepayment of the St. Germain PIMI
investment when the property was refinanced. This prepayment occurred four
months prior to the expiration of the five-year prohibition. However, the
Advisor agreed to allow the transaction to be completed while market conditions
were favorable. The Trust received the prepayment of the principal balance of
the guaranteed first mortgage, $11,006,015, the principal balance of the
Additional Loan, $2,860,000 and the Additional Loan interest due at the time of
the prepayment, $83,417. In addition, the Trust received participation income
comprised of the outstanding Preferred Return on the Trust's investment of
$89,975 and the Trust's share in the increase in the value of the underlying
property of $1,874,032. The Trust paid a special dividend on September 28,
1998 of $.87 per share from the prepayment proceeds of the St. Germain PIMI.
There are contractual restrictions on the prepayment of the PIMs and PIMIs.
During the first five years of the investment, borrowers are generally
prohibited from repayment. During the second five years, the PIM borrowers can
prepay the insured first mortgage by paying the greater of a prepayment penalty
or the participation interest due at the time of the prepayment. Similarly, the
PIMI borrowers can prepay the insured first mortgage and the Additional Loan by
satisfying the Preferred Return obligation. The participation features and the
Additional Loans are neither insured nor guaranteed. If the prepayment of the
PIM or PIMI results from the foreclosure on the underlying property or an
insurance claim, the Trust generally would not receive any participation income
or any amounts due under the Additional Loan.
The Trust has the option to call certain PIMs and all the PIMIs by accelerating
their maturity if the loans are not prepaid by the tenth year after permanent
funding. The Advisor will determine the merits of exercising the call option for
each PIM and PIMI as economic conditions warrant. Such factors as the condition
of the asset, local market conditions, the interest rate environment and
available financing will have an impact on these decisions.
Assessment of Credit Risk
The Trust's investments in mortgages, with the exception of the Additional
Loans, are guaranteed or insured by Fannie Mae, FHLMC or HUD, and therefore, the
risk of a material loss of amounts invested is remote. The certainty of
principal on the Trust's investments primarily depends upon the creditworthiness
of these entities.
Fannie Mae 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. 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 their ability to maintain occupancy levels, including control of
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 $17.7 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
<TABLE>
<CAPTION>
(amounts in thousands, except per Share amounts)
Year Ended December 31,
1998 1997 1996
Per Per Per
Amount Share Amount Share Amount Share
Interest on PIMs:
<S> <C> <C> <C> <C> <C> <C>
Basic interest $12,450 $ .68 $13,828 $ .75 $13,952 $.76
Additional loan interest 1,581 .09 2,147 .12 1,522 .08
Participation income 3,252 .18 1,770 .10 768 .04
Interest income on MBS 3,265 .18 2,847 .16 3,123 .17
Interest income - other 1,082 .06 698 .04 512 .03
Trust expenses (2,553) (.15) (2,840) (.16) (2,783) (.15)
Provision for impaired mortgage
loans (2,994) (.16) - - - -
Amortization of prepaid fees and
expenses and organization costs (2,900) (.16) (2,187) (.12) (2,095) (.11)
Net income $13,183 $ .72 $16,263 $ .89 $14,999 $.82
Weight Average Shares Outstanding 18,371,477 18,371,477 18,371,477
</TABLE>
The Trust's total interest income for 1998 as compared to 1997 increased by
approximately $340,000 due to higher participation income, interest income on
MBS and interest income other, which was partially offset by decreases in basic
interest on PIMs and PIMIs and Additional Loan interest. The increase in
participation income in 1998 as compared to 1997 is due primarily to the Trust's
receipt of approximately $2,323,000 from the operations and repayment of the St.
Germain PIMI and approximately $929,000 from its other PIMS and PIMIs in 1998,
versus $789,000 due to the repayment of the Willows Additional Loan and $981,000
of participation on the other PIMs and PIMIs. The increase in interest income on
MBS is due to reclassifying the MBS portion of The Willows PIMI and The Estates
PIM as MBS as a result of property sale transactions in 1997 from which the
Trust received all participation owed but will continue to receive principal and
interest on the first mortgage loan from the buyer. This transaction, along with
the St. Germain prepayment, also caused a decrease in the basic interest on PIMs
and PIMIs in 1998 as compared to 1997. The increase in other interest income is
due to the Trust having higher short-term investment balances for 1998 as
compared to 1997.
Additional Loan interest decreased due to the repayment of St. Germain
in 1998 and Willows in the third quarter of 1997. Interest income on MBS and
basic interest on PIMs and PIMIs will generally decline as principal collections
reduce the outstanding balance of the MBS, PIM and PIMI portfolios.
Trust expenses decreased by approximately $287,000 or 10% in 1998 as compared to
1997 primarily due to decreases in expense reimbursements and asset management
fees. In addition, the Trust recorded a provision for impaired mortgage loans of
$2,994,000 related to Windmill Lakes and Oasis. 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 during 1998. The decrease in
asset management fees when comparing 1998 to 1997 resulted from the Trust's
asset base declining.
The Trust's total interest income for 1997 as compared to 1996 increased by
approximately $1,413,000 due to higher Additional Loan interest, participation
income and other interest income, which was partially offset by decreases in
interest income on MBS and basic interest on PIMs and PIMIs. The increase in
participation income was primarily due to the Trust receiving Participating
Appreciation Interest of approximately $789,000 from the preferred return
payment related to the Willows Additional Loan payoff and participation income
of approximately $981,000 from 10 of its PIMs and PIMIs, as compared to $768,000
from seven of its PIMs and PIMIs in 1996. The Seasons, which was completely
renovated in 1994 and 1995, performed very well during 1996 and 1997. As a
result, in 1997, the Trust began recognizing Additional Loan interest and
participation income from The Seasons.
Trust expenses increased by approximately $57,000 or 2% in 1997 as compared to
1996 primarily due to an increase in expense reimbursements and general and
administrative expense. This was offset by lower asset management fees resulting
from a declining asset base when comparing 1997 to 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the Trustees and Executive Officers of Krupp Government
Income Trust II is as follows:
Position with Krupp
Name and Age Government Income Trust II
Douglas Krupp (52) Chairman of Board of Trustees and
Trustee
* Charles N. Goldberg (57) Trustee
* E. Robert Roskind (54) Trustee
* J. Paul Finnegan (74) Trustee
Robert A. Barrows (41) Treasurer
Scott D. Spelfogel (38) Clerk
Kristin L. Hicks (32) Assistant Clerk
* Independent Trustee
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive
Officer of The Berkshire Group, an integrated real estate financial services
firm engaged in real estate acquisition and property management, mortgage
banking and financial management. The Berkshire Group's interests include
ownership of a mortgage company specializing in commercial mortgage financing
with a portfolio of approximately $6.0 billion. In addition, The Berkshire Group
has a significant ownership interest in Berkshire Realty Company, Inc.
(NYSE-BRI), a real estate investment trust specializing in apartment
investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire
Group was established as The Krupp Companies in 1969 and he has served as the
Chief Executive Officer since 1992. Mr. Krupp serves as Chairman of the Board
and Director of Berkshire Realty Company, Inc. (NYSE-BRI) and he is also a
member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate
of Bryant College where he received an honorary Doctor of Science in Business
Administration in 1989 and was elected trustee in 1990. Mr. Krupp also serves as
Chairman of the Board and Trustee of Krupp Government Income Trust II.
Charles N. Goldberg is of counsel to the law firm of Broocks, Baker &
Lange, L.L.P., which position he has held since December of 1997. Prior to
joining Broocks, Baker & Lange, L.L.P., Mr. Goldberg was a partner in the law
firm of Hirsch & Westheimer from March of 1996 to December of 1997. Prior to
Hirsch & Westheimer, he was the Managing Partner of Goldberg Brown, Attorneys at
Law from 1980 to March of 1996. He received a B.B.A. degree and a J.D. degree
from the University of Texas. He is a member of the State Bar of Texas and is
admitted to practice before the U.S. Court of Appeals, Fifth Circuit and U.S.
District Court, Southern District of Texas. He currently serves as a Trustee of
Krupp Government Income Trust II and a director of Berkshire Realty Company,
Inc. (NYSE-BRI).
E. Robert Roskind is the Chairman and Co-Chief Executive Officer of
Lexington Corporate Properties, a self-administered REIT, the shares of which
are listed on the NYSE. Mr. Roskind has served in this capacity since October of
1993. Mr. Roskind is also the Managing Partner of The LCP Group, a real estate
investment firm based in New York, the predecessor of which he co-founded in
1974. He holds a B.A. degree from the University of Pennsylvania and a J.D.
degree from Columbia Law School. He has been a member of the New York Bar since
1970. He currently serves as a Trustee of Krupp Government Income Trust II. He
is also currently a director of Berkshire Realty Company, Inc. (NYSE-BRI), as
well as Chairman of the Board of Trustees of Lexington Corporate Properties.
J. Paul Finnegan retired as a partner of Coopers & Lybrand in 1987. Since
then, he has been engaged in business as a consultant, a director and
arbitrator. Mr. Finnegan holds a B.A. degree from Harvard College, a J.D. degree
from Boston College Law School and an ASA from Bentley College. Mr. Finnegan is
a Certified Public Accountant and an attorney. Mr. Finnegan currently serves as
a Trustee of Krupp Government Income Trust II and a director at Scituate Federal
Savings Bank and a director of Berkshire Realty Company, Inc. (NYSE-BRI). Mr.
Finnegan is a Certified Public Accountant and an attorney.
Robert A. Barrows is the Treasurer of the Trust and is Senior Vice
President and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows
has held several positions within The Berkshire Group since joining the company
in 1983 and is currently responsible for accounting, financial reporting,
treasury and management information systems for Berkshire Mortgage Finance.
Prior to joining The Berkshire Group, he was an audit supervisor for Coopers &
Lybrand L.L.P. in Boston. He received a B.S. degree from Boston College and is a
Certified Public Accountant.
Scott D. Spelfogel is the Clerk of the Trust and is Senior Vice
President and General Counsel to The Berkshire Group. Prior to 1997, he served
as Vice President and Assistant General Counsel. Before joining the firm in
November 1988, he was a litigator in private practice in Boston. He received a
Bachelor of Science degree in Business Administration from Boston University, a
Juris Doctor Degree from Syracuse University's College of Law, and a Master of
Laws degree in Taxation from Boston University Law School. He is admitted to
practice law in Massachusetts and New York, is a member of the American, Boston,
Massachusetts and New York State bar associations and is a licensed real estate
broker in Massachusetts.
Kristin L. Hicks is the Assistant Clerk of the Trust and is Assistant General
Counsel to The Berkshire Group. Prior to 1999, she served as Staff Attorney for
The Berkshire Group beginning in September 1997, and prior to that position, she
was the manager of the transfer department for Krupp Funds Group from May of
1992 through September of 1997. She received a B.A. degree from Northeastern
University in 1989 and a J.D. degree from the Suffolk University Law School in
1995. She is admitted to practice law in Massachusetts and is a member of the
American, Massachusetts and Boston bar associations.
In addition, the following are deemed to be Executive Officers of the
registrant:
George Krupp (age 54) is the Co-Founder and Co-Chairman of The Berkshire
Group, an integrated real estate financial services firm engaged in real estate
acquisition and property management, mortgage banking and financial management.
The Berkshire Group's interests include ownership of a mortgage company
specializing in commercial mortgage financing with a portfolio of approximately
$6.0 billion. In addition, The Berkshire Group has a significant ownership
interest in Berkshire Realty Company, Inc. (NYSE-BRI), a real estate investment
trust specializing in apartment investments. Mr. Krupp has held the position of
Co-Chairman since The Berkshire Group was established as The Krupp Companies in
1969. Mr. Krupp has been an instructor of history at the New Jewish High School
in Waltham, Massachusetts since December of 1997. Mr. Krupp attended the
University of Pennsylvania and Harvard University and holds a Master's Degree in
History from Brown University.
Peter F. Donovan (age 45) is Chief Executive Officer of Berkshire Mortgage
Finance which position he has held since January of 1998 and in this capacity,
he oversees the strategic growth plans of this mortgage banking firm. Berkshire
Mortgage Finance is the 16th largest in the United States based on servicing and
asset management of a $5.7 billion loan portfolio. Previously he served as
President of Berkshire Mortgage Finance from January of 1993 to January of 1998
and in that capacity he directed the production, underwriting, servicing and
asset management activities of the firm. Prior to that, he was Senior Vice
President of Berkshire Mortgage Finance and was responsible for all
participating mortgage originations. Before joining the firm in 1984, he was
Second Vice President, Real Estate Finance for Continental Illinois National
Bank & Trust, where he managed a $300 million construction loan portfolio of
commercial properties. Mr. Donovan received a B.A. from Trinity College and an
M.B.A. degree from Northwestern University.
Ronald Halpern (age 57) is President and COO of Berkshire Mortgage
Finance. He has served in these positions since January of 1998 and in this
capacity, he is responsible for the overall operations of the Company. Prior to
January of 1998, he was Executive Vice President, managing the underwriting,
closing, portfolio management and servicing departments for Berkshire Mortgage
Finance. Before joining the firm in 1987, he held senior management positions
with the Department of Housing and Urban Development in Washington D.C. and
several HUD regional offices. Mr. Halpern has over 30 years of experience in
real estate finance. He is currently a member of the Advisory Council for Fannie
Mae and Freddie Mac and was prior Chairman of the MBA Multifamily Housing
Committee. He holds a B.A. degree from the University of the City of New York
and J.D. degree from Brooklyn Law School.
Carol J.C. Mills (age 49) is Senior Vice President for Loan Management
of Berkshire Mortgage Finance and in this capacity, she is responsible for the
Loan Servicing and Asset Management functions of the Boston,Bethesda and
Seattle offices of Berkshire Mortgage Finance. She manages the estimated $6
billion portfolio of loans. Ms. Mills joined Berkshire in December 1997 as
Vice President and was promoted to Senior Vice President in January 1999.
From January 1989 through November 1997, Ms. Mills was Vice President of First
Winthrop Corporation and Winthrop Financial Associates, in Cambridge, MA.
Ms. Mills earned a B.A. degree from Mount Holyoke College and a Master of
Architecture degree from Harvard University. Ms. Mills is a member of the Real
Estate Finance Association, New England Women in Real Estate and the Mortgage
Bankers Association.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Except for the Independent Trustees as described below, the Trustees and
Officers of the Trust have not been and will not be compensated by the Trust for
their services. However, the Officers will be compensated by the Advisor or an
affiliate of the Advisor.
Compensation of Trustees
The Trust paid each of the Independent Trustees a fee of $25,000 in 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 5, 1999, no person owned of record or was known by the Advisor
to own beneficially more than 5% of the Trust's 18,371,477 outstanding Shares.
The only Shares held by the Advisor or any of its affiliates consist of the
original 10,000 Shares held by the Advisor.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class of Name of Beneficial Amount and Nature of Percent
Stock Owner Beneficial Interest of Class
Shares of Douglas Krupp
Beneficial One Beacon Street
Interest Boston, Ma. 02108 10,000 Shares** ***
Shares of
Beneficial
Interest All Directors and 10,000 Shares ***
Officers
</TABLE>
** Mr. Krupp is a beneficial owner of the 10,000 shares held by Berkshire
Mortgage Advisors Limited Partnership, the Advisor to the Company, by virtue of
being a director of Berkshire Funding Corporation, the general partner of
Berkshire Mortgage Advisors Limited Partnership. In each case where Mr. Krupp is
a beneficial owner of shares he has shared voting and investment powers.
*** The amount owned does not exceed one percent of the shares of beneficial
interest of the Trust outstanding as of February 5, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note G to Financial Statements included in Appendix A of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements - see Index to Financial Statements and
Supplementary Data included under Item 8, Appendix A, on page F-2 of
this report.
2. Financial Statement Schedules - see Index to Financial Statements
and Supplementary Data included under Item 8, Appendix A, on page
F-2 of this report. All schedules are omitted as they are not
applicable, not required or the information is provided in the
Financial Statements or the Notes thereto.
(b) Exhibits:
Number and Description
Under Regulation S-K
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K:
(4) Instruments defining the rights of security holders including
indentures:
(4.1) Fourth Amended and Restated Declaration of Trust filed
with The Massachusetts Secretary of State on September
25, 1991 [Included as Exhibit 4.8 to Post-effective
Amendment No. 1 to Registrant's Registration Statement
on Form S-11 dated September 26, 1991 (File No.
33-39033)].*
(4.2) Subscription Agreement Specimen [Included as
Exhibit C to Prospectus included in
Post-effective Amendment No. 1 to Registrant's
Registration Statement on Form S-11 dated
September 26, 1991 (File No. 33-39033)].*
(10) Material Contracts
(10.1) Advisory Services Agreement dated September 11, 1991
between Krupp Government Income Trust II and Berkshire
Realty Advisors Limited Partnership (formerly known as
Krupp Realty Advisors Limited Partnership)[Exhibit 10.1
to Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
(10.2) Assignment and Assumption Agreement between Berkshire
Realty Advisors Limited Partnership and Berkshire
Mortgage Advisors Limited Partnership [Exhibit 10.2 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
Mequon Trails
(10.3) Supplement to Prospectus dated January 1, 1993 for
Federal National Mortgage Association pool number
MX-073025 [Exhibit 19.1. to Registrant's Report on Form
10-Q for the quarter ended March 31, 1993 (File No.
0-20164)].*
(10.4) Subordinated promissory note dated December 21, 1992 by
and between Mequon Trails Townhomes Limited Partnership
and Krupp Government Income Trust II [Exhibit 19.2 to
Registrant's Report on Form 10-Q for the quarter ended
March 31, 1993 (File No.
0-20164)].*
(10.5) Subordinate Multifamily Mortgage dated December 21, 1992
between Mequon Trails Townhomes Limited Partnership and
Krupp Government Income Trust II.[Exhibit 10.5 to
Registrant=s report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
(10.6) Subordination Agreement dated December 21, 1992 between
Krupp Mortgage Company L.P., Krupp Government Income
Trust II and Mequon Trails Townhomes Limited
Partnership.[Exhibit 10.6 to Registrant=s report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
The Estates
(10.7) Deed of Trust Note dated May 14, 1993 for The Estates
[Exhibit 19.1 to Registrant's Report on Form 10-Q for
the quarter ended June 30, 1993.[Exhibit 10.7 to
Registrant=s report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
(10.8) Deed of Trust dated May 14, 1993 for The Estates Limited
Partnership and Maryland National Mortgage
Corporation.[Exhibit 10.8 to Registrant=s report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.9) Multifamily Deed of Trust, Assignment of Rents and
Security Agreement dated May 14, 1993 between The
Estates Limited Partnership and Krupp Government Income
Trust.[Exhibit 10.9 to Registrant=s report on Form 10-K
for the year ended December 31, 1995 (File No.
0-20164)].*
(10.10) Participation and Servicing Agreement dated May 14, 1993
by and between Maryland National Mortgage Corporation
and Krupp Government Income Trust II [Exhibit 19.2 to
Registrant's Report on Form 10-Q for the quarter ended
June 30, 1993 (File No. 0-20164)].*
The Seasons
(10.11) Subordinated Promissory Note, dated September 16, 1993,
between Maryland Associates Limited Partnership and
Krupp Government Income Trust [Exhibit 10.1 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1993 (File No. 0-20164)].*
(10.12) Additional Loan Agreement dated September 16, 1993
between the Krupp Company Limited Partnership-IV and
Krupp Government Income Trust II [Exhibit 10.2 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1993 (file No. 0-20164)].*
(10.13) Additional Loan Note dated September 16, 1993, between
the Krupp Company Limited Partnership-IV and Krupp
Government Income Trust II [Exhibit 10.3 to Registrant's
Report on form 10-Q for the quarter ended September 30,
1993 (File No. 0-20164)].*
(10.14) Participation and Servicing Agreement dated September
16, 1993 by and between Krupp Mortgage Corporation and
Krupp Government Income Trust-II [Exhibit 10.4 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1993 (File No.0-20164)].*
(10.15) Deed of Trust Note dated September 16, 1993 for Maryland
Associates Limited Partnership and Krupp Mortgage
Corporation [Exhibit 10.11 to Registrant's report on
Form 10-K for the year ended December 31, 1994 (File No.
0-20164)].*
(10.16) Assignment and Assumption Agreement dated September 16,
1993 between Krupp Government Income Trust II and Krupp
Government Income Trust [Exhibit 10.12 to Registrant's
report on Form 10-K for the year ended December 31, 1994
(File No. 0-20164)].*
(10.17) Agreement re Subordinated Note dated September 16, 1993
between Krupp Mortgage Corporation and Krupp Government
Income Trust II [Exhibit 10.13 to Registrant's report on
Form 10-K for the year ended December 31, 1994 (File No.
0-20164)].*
Martin's Landing
(10.18) Subordinated Loan Agreement, dated November 9, 1993,
between TRC Realty Incorporated - ML, ML Associates
Limited Partnership ("Borrower") and Krupp Government
Income Trust II ("Holder") [Exhibit 10.9 to Registrant's
annual report on Form 10-K for fiscal year ended
December 31, 1993 (File No. 0-20164)].*
(10.19) Subordination Agreement dated November 9, 1993 between
ML Associates, L.P., and Krupp Government Income Trust
II.[Exhibit 10.22 to Registrant=s report on Form 10-K
for the year ended December 31, 1995 (File No.
0-20164)].*
(10.20) Assignment of Subordination Agreement dated November 9,
1993 from Berkshire Mortgage Finance Limited Partnership
to the Federal National Mortgage Association by and
between ML Associates, L.P., Berkshire Mortgage Finance
Limited Partnership and Krupp Government Income Trust
II.[Exhibit 10.23 to Registrant=s report on Form 10-K
for the year ended December 31, 1995 (File No.
0-20164)].*
(10.21) Supplement to Prospectus dated December 1, 1993 for
Federal National Mortgage Association pool number MX -
073029.[Exhibit 10.24 to Registrant=s report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
Crossings Village
(10.22) Subordinated Loan Agreement, dated September 28, 1993
between Crossings Village Westlake Associates
("Borrower") and Krupp Government Income Trust II
("Holder")[Exhibit 10.10 to Registrant's annual report
on Form 10-K for fiscal year ended December 31, 1993
(File No.
0-20164)].*
(10.23) Subordinated Note dated September 28, 1993 between
Crossings Village Westlake Associates and Krupp
Government Income Trust II [Exhibit 10.16 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
(10.24) Subordination Agreement dated September 28, 1993 between
Washington Capital DUS Inc., Crossings Village Westlake
Associates and Krupp Government Income Trust II.[Exhibit
10.27 to Registrant=s report on Form 10-K for the year
ended December 31, 1995 (File No.
0-20164)].*
Norumbega Point
(10.25) Subordinated Promissory Note, dated December 14, 1993
between Longa Vita Corporation ("Maker or Mortgagor")
and Krupp Government Income Trust II ("Holder")[Exhibit
10.11 to Registrant's annual report on Form 10-K for
fiscal year ended December 31, 1993 (File No.
0-20164)].*
(10.26) Additional Loan Note dated December 14, 1993 between
Evelyn Insoft, Sidney Insoft, Richard Slifka, and Alfred
A. Slifka ("Borrowers") and Krupp Government Income
Trust II ("Holder") [Exhibit 10.12 to Registrant's
annual report on Form 10-K for fiscal year ended
December 31, 1993 (File No. 0-20164)].*
(10.27) Participation and Servicing Agreement dated December 14,
1993 by and between Cambridge Healthcare Funding, Inc.
and Krupp Government Income Trust II.[Exhibit 10.30 to
Registrant=s report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
(10.28) Subordinated Multifamily Mortgage Assignment of Rents
and Security Agreement dated December 14, 1993 between
Longa Vita Corp. and Krupp Government Income Trust
II.[Exhibit 10.31 to Registrant=s report on Form 10-K
for the year ended December 31, 1995 (File No.
0-20164)].*
(10.29) Additional Loan Agreement dated December 14, 1993
between the Evelyn Insoft, Sidney
Insoft, Richard Slifka and Alfred A. Silfka, Longa
Vita Corp. and Krupp Government Income
Trust II.[Exhibit 10.32 to Registrant's report on
Form 10-K for the year ended December
31, 1995 (File No. 0-20164)].*
(10.30) Mortgage Note dated December 14, 1993 between Longa
Vita Corp. and Cambridge Healthcare Funding, Inc.
[Exhibit 10.33 to Registrant's report on Form 10-K
for the year ended December 31, 1995 (File No. 0-20164)].*
(10.31) Agreement re Subordinated Note dated December 14, 1993
between Cambridge Healthcare Funding, Inc. and Krupp
Government Income Trust II.[Exhibit 10.34 to
Registrant=s report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
Sunset Summit
(10.32) Subordinated Loan Agreement dated November 24, 1993
between Sunset Summit Limited Partnership and Krupp
Government Income Trust II [Exhibit 10.21 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
(10.33) Subordinated Note dated November 24, 1993 between Sunset
Summit Limited Partnership and Krupp Government Income
Trust II [Exhibit 10.22 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-20164)].*
(10.34) Subordination Agreement dated November 24, 1993 between
BMFLP, Sunset Summit Limited Partnership and Krupp
Government Income Trust II [Exhibit 10.23 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
(10.35) Assignment of Subordination Agreement dated November 24,
1993 from Berkshire Mortgage Finance Limited Partnership
to the Federal National Mortgage Association by and
between Sunset Summit Limited Partnership, Berkshire
Mortgage Finance Limited Partnership and Krupp
Government Income Trust II [Exhibit 10.24 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
(10.36) Subordinate Multifamily Mortgage Agreement dated
November 24, 1993 between Sunset Summit Limited
Partnership and Krupp Government Income Trust II
[Exhibit 10.25 to Registrant's report on Form 10-K for
the year ended December 31, 1994 (File No. 0-20164)].*
(10.37) Supplement to Prospectus dated January 1, 1994 for
Federal National Mortgage Association pool number MX -
073030 [Exhibit 10.26 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-20164)].*
Windsor Lake
(10.38) Subordinated Loan Agreement dated June 16, 1994
between Cedar Lake L. P. and Krupp Government Income
Trust II [Exhibit 10.27 to Registrant's report on
Form 10-K for the year ended December 31, 1994 (File No.
0-20164)].*
(10.39) Subordinate Note dated June 16, 1994 between
Cedar Lake L. P. and Krupp Government Income
Trust II [Exhibit 10.28 to Registrant's report on
Form 10-K for the year ended December 31, 1994
(File No. 0-20164)].*
(10.40) Subordination Agreement dated June 16, 1994 between
Berkshire Mortgage Finance Limited Partnership, Cedar
Lake L. P. and Krupp Government Income Trust II [Exhibit
10.29 to Registrant's report on Form 10-K for the year
ended December 31, 1994 (File No.
0-20164)].*
(10.41) Assignment of Subordination Agreement dated June 16,
1994 from Berkshire Mortgage Finance Limited Partnership
to the Federal National Mortgage Association by and
between, Cedar Lake L.P. and Berkshire Mortgage Finance
Limited Partnership and Krupp Government Income Trust II
[Exhibit 10.30 to Registrant's report on Form 10-K for
the year ended December 31, 1994 (File No. 0-20164)].*
(10.42) Subordinate Multifamily Deed to Secure Debt Agreement
dated June 16, 1994 between Cedar Lake L.P. and Krupp
Government Income Trust II [Exhibit 10.31 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-20164)].*
(10.43) Supplement to Prospectus dated October 1, 1994 for
Federal National Mortgage Association pool number MX -
073039 [Exhibit 10.32 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-20164)].*
Oasis at Springtree
(10.44) Subordinate Note dated June 16, 1994 between Oasis at
Springtree, Inc. and Krupp Government Income Trust II
[Exhibit 10.33 to Registrant's report on Form 10-K for
the year ended December 31, 1994 (File No. 0-20164)].*
(10.45) Subordinated Loan Agreement dated August 11, 1994
between Joseph Kodsi and Albert Kodsi, Oasis at
Springtree, Inc., and Krupp Government Income Trust
II.[Exhibit 10.48 to Registrant=s report on Form 10-K
for the year ended December 31, 1995 (File No.
0-20164)].*
(10.46) Subordination Agreement dated August 11, 1994 between
Berkshire Mortgage Finance Limited Partnership, Oasis at
Springtree, Inc. and Krupp Government Income Trust
II.[Exhibit 10.49 to Registrant=s report on Form 10-K
for the year ended December 31, 1995 (File. No
0-20164)].*
(10.47) Assignment of Subordination Agreement dated August 11,
1994 for Berkshire Mortgage Finance Limited Partnership
with Federal National Mortgage Association by and
between Oasis at Springtree, Inc., Berkshire Mortgage
Finance Limited Partnership and Krupp Government Income
Trust II.[Exhibit 10.50 to Registrant=s report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.48) Subordinated Multifamily Mortgage Assignment of Rents
and Security Agreement dated August 11, 1994 between
Oasis at Springtree, Inc. and Krupp Government Income
Trust II.[Exhibit 10.51 to Registrant=s report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.49) Supplement to Prospectus dated January 1, 1994 for
Federal National Mortgage Association pool number MX -
073043.[Exhibit 10.52 to Registrant=s report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
The Willows
(10.50) Supplement to Prospectus dated January 1, 1994 for
Federal National Mortgage Association pool number MX -
073057 [Exhibit 10.42 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-20164)].*
Windmill Lakes
(10.51) Subordinated Loan Agreement dated February 3, 1995
between Robert B. Kramer and Rose Berger, Windmill
Lakes, Inc., and Krupp Government Income Trust II
[Exhibit 10.1 to Registrant's report on Form 10-Q for
the quarter ended September 30, 1995 (File No.
0-20164)].*
(10.52) Subordinate Note dated February 3, 1995 between Windmill
Lakes, Inc., and Krupp Government Income Trust II
[Exhibit 10.2 to Registrant's report on Form 10-Q for
the quarter ended September 30, 1995 (File No.
0-20164)].*
(10.53) Subordinate Multifamily Mortgage Agreement dated
February 3, 1995 between Windmill Lakes, Inc., and Krupp
Government Income Trust II [Exhibit 10.3 to Registrant's
report on Form 10-Q for the quarter ended September 30,
1995 (File No. 0-20164)].*
(10.54) Subordination Agreement dated February 3, 1995 by and
among Green Park Financial Limited Partnership, Krupp
Government Income Trust II and Windmill Lakes, Inc.
[Exhibit 10.4 to Registrant's report on Form 10-Q for
the quarter ended September 30, 1995 (File No.
0-20164)].*
The Lakes
(10.55) Subordinated Loan Agreement dated June 29, 1995,
between Lake Associates, L. P. and Krupp
Government Income Trust II [Exhibit 10.5 to
Registrant's report on Form 10-Q for the
quarter ended September 30, 1995 (File No. 0-20164)].*
(10.56) Subordinate Note dated June 29, 1995, between Lake
Associates, L. P. and Krupp Government Income Trust II
[Exhibit 10.6 to Registrant's report on Form 10-Q for
the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.57) Subordinate Multifamily Mortgage to Secure Debt
Agreement dated June 29, 1995, between Lake Associates,
L. P. and Krupp Government Income Trust II [Exhibit 10.7
to Registrant's report on Form 10-Q for the quarter
ended September 30, 1995 (File No.
0-20164)].*
(10.58) Subordination Agreement dated June 29, 1995, between
Berkshire Mortgage Finance Limited Partnership, Lake
Associates, L. P. and Krupp Government Income Trust II
[Exhibit 10.8 to Registrant's report on Form 10-Q for
the quarter ended September 30, 1995 (File No.
0-20164)].*
(10.59) Assignment of Subordination Agreement dated June 29,
1995, from Berkshire Mortgage Finance Limited
Partnership to the Federal National Mortgage Association
by and between, Lake Associates, L.P. and Berkshire
Mortgage Finance Limited Partnership and Krupp
Government Income Trust II [Exhibit 10.9 to Registrant's
report on Form 10-Q for the quarter ended September 30,
1995 (File No. 0-20164)].*
(10.60) Supplement to Prospectus dated November 1, 1994 for
Federal National Mortgage Association pool number MX -
073149 [Exhibit 10.10 to Registrant's report on Form
10-Q for the quarter ended September 30, 1995 (File No.
0-20164)].*
The Fountains
(10.61) Subordinated Promissory Note dated April 24, 1995
between CSM Fountains Limited Partnership and Krupp
Government Income Trust II [Exhibit 10.11 to
Registrant's report on Form 10-Q for the quarter ended
September 30, 1995 (File No. 0-20164)].*
(10.62) Agreement Re: Subordinated Note dated April 24, 1995
between Berkshire Mortgage Finance Corporation and Krupp
Government Income Trust II [Exhibit 10.12 to
Registrant's report on Form 10-Q for the quarter ended
September 30, 1995 (File No. 0-20164)].*
(10.63) Subordinated Multifamily Mortgage Assignment of Rents
and Security Agreement dated April 24, 1995 between CSM
Fountains Limited Partnership and Krupp Government
Income Trust II [Exhibit 10.13 to Registrant's report on
Form 10-Q for the quarter ended September 30, 1995 (File
No. 0-20164)].*
Falls at Hunter Pointe
(10.64) Additional Loan Note dated August 5, 1993 between
Goulding L. Stoddard ("Borrower") and Krupp Government
Income Trust ("Holder").[Exhibit 10.92 to Registrant's
report on Form 10-K for the year ended December 31, 1995
(File No. 0-20164)].*
(10.65) Additional Loan Agreement dated August 5, 1993 between
Goulding L. Stoddard ("Borrower") and Krupp Government
Income Trust ("Holder").[Exhibit 10.93 to Registrant's
report on Form 10-K for the year ended December 31, 1995
(File No. 0-20164)].*
(10.66) Subordinated Promissory Note, dated August 4, 1993
between Hunters Pointe Associates, Ltd. ("Maker" or
"Mortgagor") and Krupp Government Income Trust
("Holder").[Exhibit 10.94 to Registrant's report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.67) Agreement re Subordinated Note dated August 5, 1993
between TRI Capital Corporation and Krupp Government
Income Trust.[Exhibit 10.95 to Registrant's report on
Form 10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.68) Subordinated Multifamily Deed of Trust, Assignment of
Rents and Security Agreement dated August 5, 1993
between Hunters Pointe Associates, Ltd. and Krupp
Government Income Trust.[Exhibit 10.96 to Registrant's
report on Form 10-K for the year ended December 31, 1995
(File No. 0-20164)].*
(10.69) Participation and Servicing Agreement dated August 5,
1993 by and between TRI Capital Corporation and Krupp
Government Income Trust.[Exhibit 10.97 to Registrant's
report on Form 10-K for the year ended December 31, 1995
(File No. 0-20164)].*
Rivergreens Apartments
(10.70) Mortgage Note dated August 19, 1993 between Rivergreens
Associates II Limited Partnership and Krupp Mortgage
Company Limited Partnership.[Exhibit 10.98 to
Registrant's report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
(10.71) Subordinated Promissory Note, dated August 19, 1993,
between Rivergreens Associates II Limited Partnership
and Krupp Government Income Trust.[Exhibit 10.99 to
Registrant's report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
(10.72) Subordinated Multifamily Deed of Trust, Assignment of
Rents and Security Agreement dated August 19, 1993
between Rivergreens Associates II Limited Partnership
and Krupp Government Income Trust II.[Exhibit 10.100 to
Registrant's report on Form 10-K for the year ended
December 31, 1995 (File No. 0-20164)].*
Mill Pond II Apartments
(10.73) Mortgage Note dated July 26, 1994 for Mill Pond II
Limited Partnership and Krupp Mortgage Company Limited
Partnership.[Exhibit 10.101 to Registrant=s report on
Form 10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.74) Multifamily Subordinated Mortgage, Assignment of Rents
and Security Agreement dated July 26, 1994 between Mill
Pond II Limited Partnership and Krupp Government Income
Trust II.[Exhibit 10.102 to Registrant's report on Form
10-K for the year ended December 31, 1995 (File No.
0-20164)].*
(10.75) Subordinated Promissory Note, dated July 26, 1994,
between Mill Pond II Limited Partnership and Krupp
Government Income Trust.[Exhibit 10.103 to Registrant's
report on Form 10-K for the year ended December 31, 1995
(File No. 0-20164)].*
(10.76) Agreement re Subordinated Note dated July 26, 1994,
between Berkshire Mortgage Finance Corporation and Krupp
Government Income Trust.[Exhibit 10.104 to Registrant's
report on Form 10-K for the year ended December 31, 1995
(File No. 0-20164)].*
* Incorporated by reference
(c) Reports on Form 8-K
The Trust did not file any reports on Form 8-K during the quarter ended
December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 12th day of
March, 1999.
KRUPP GOVERNMENT INCOME TRUST II
/s/Douglas Krupp
By: /s/ Douglas Krupp
Douglas Krupp, Chairman of Board of Trustees
and a Trustee of Krupp Government Income Trust II
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 12th day of March, 1999.
Signatures Title(s)
/s/ Douglas Krupp Chairman of Board of Trustees and a
Douglas Krupp Trustee of Krupp Government Income Trust II
/s/ Robert A. Barrows Treasurer of Krupp Government Income
Robert A. Barrows Trust II
/s/ Charles N. Goldberg Trustee of Krupp Government Income Trust II
Charles N. Goldberg
/s/ E. Robert Roskind Trustee of Krupp Government Income Trust II
E. Robert Roskind
/s/ J. Paul Finnegan Trustee of Krupp Government Income Trust II
J. Paul Finnegan
<PAGE>
APPENDIX A
KRUPP GOVERNMENT INCOME TRUST II
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1998
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants F-3
Balance Sheets at December 31, 1998 and 1997 F-4
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 F-5
Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996 F-7
Notes to Financial Statements F-8 - F-21
Schedule II - Valuation and Qualifying Accounts F-22
Supplementary Data - Selected Quarterly Financial Data (Unaudited) F-23
All other schedules are omitted as they are not applicable or not required, or
the information is provided in the financial statements or the notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Krupp Government Income Trust II:
In our opinion, the accompanying financial statements and financial
statement schedule listed in the index on page F-2 of this Form 10-K present
fairly, in all material respects, the financial position of Krupp Government
Income Trust II (the "Trust") at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 12, 1999
<PAGE>
F-22
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
Participating Insured Mortgage Investments ("PIMIs")(Notes B, C and I):
<S> <C> <C>
Insured mortgages $133,132,325 $145,537,234
Additional loans, net 23,298,351 29,152,351
Participating Insured Mortgages ("PIMs")
(Notes B, D and I) 38,331,257 37,645,082
Mortgage-Backed Securities ("MBS")and Insured
mortgage loans
(Notes B, E and I) 41,834,199 51,171,301
Total mortgage investments 236,596,132 263,505,968
Cash and cash equivalents (Notes B and I) 18,010,578 13,520,091
Prepaid acquisition fees and expenses, net of
accumulated amortization of $7,167,563 and
$6,099,180 (Note B) 8,289,549 10,384,462
Prepaid participation servicing fees, net of
accumulated amortization of $2,321,513 and
$1,858,497 (Note B) 2,830,857 3,636,050
Interest receivable and other assets 1,682,882 2,111,153
Total assets $267,409,998 $293,157,724
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note B) $ 2,719,343 $ 2,755,705
Other liabilities 43,563 30,949
Total liabilities 2,762,906 2,786,654
Shareholders' equity (Notes A and F):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 264,099,856 289,864,327
Accumulated comprehensive
income (Notes B and E) 547,236 506,743
Total Shareholders' equity 264,647,092 290,371,070
Total liabilities and Shareholders'
equity $267,409,998 $293,157,724
The accompanying notes are an integral
part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Revenues:
Interest income - PIMs and PIMIs:
<S> <C> <C> <C>
Basic interest $12,449,922 $13,828,125 $13,952,237
Additional Loan interest 1,580,517 2,147,468 1,521,980
Participation income 3,252,020 1,769,701 767,747
Interest income - MBS 3,264,905 2,847,442 3,122,508
Interest income - other 1,082,305 697,819 512,459
Total revenues 21,629,669 21,290,555 19,876,931
Expenses:
Asset management fee to an
affiliate (Note G) 1,889,509 2,002,992 2,056,861
Expense reimbursements to
affiliates (Note G) 227,556 446,357 391,260
Amortization of prepaid expenses,
fees and organization costs 2,900,106 2,186,556 2,094,905
General and administrative 435,387 391,165 334,723
Provision for impaired mortgage
loans (Notes B and C) 2,994,000 - -
Total expenses 8,446,558 5,027,070 4,877,749
Net income (Notes B and H) $13,183,111 $16,263,485 $14,999,182
Basic earnings per share $ .72 $ .89 $ .82
Weighted average shares
outstanding 18,371,477 18,371,477 18,371,477
The accompanying notes are an integral
part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
Accumulated Total
Retained Comprehensive Shareholders'
Common Stock Earnings Income Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $304,530,460 $ - $1,387,525 $305,917,985
Dividends (7,965,219) (14,999,182) - (22,964,401)
Net income - 14,999,182 - 14,999,182
Change in unrealized gain on MBS - - (1,265,190) (1,265,190)
Balance at December 31, 1996 296,565,241 - 122,335 296,687,576
Dividends (6,700,914) (16,263,485) - (22,964,399)
Net income - 16,263,485 - 16,263,485
Change in unrealized gain on MBS - - 384,408 384,408
Balance at December 31, 1997 289,864,327 - 506,743 290,371,070
Dividends (25,764,471) (13,183,111) - (38,947,582)
Net income - 13,183,111 - 13,183,111
Change in unrealized gain on MBS - - 40,493 40,493
Balance at December 31, 1998 $264,099,856 $ - $ 547,236 $264,647,092
Shares issued and outstanding for each of the three years in the period ended
December 31, 1998 are 18,371,477
The accompanying notes are an integral
part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Operating activities:
<S> <C> <C> <C>
Net income $ 13,183,111 $ 16,263,485 $ 14,999,182
Adjustments to reconcile net income
to net cash provided by operating
activities:
Premium amortization 185,276 113,094 169,589
Provision for impaired mortgage loans 2,994,000 - -
Amortization of prepaid expenses,
fees and organization costs 2,900,106 2,186,556 2,094,905
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 428,271 153,534 33,162
Increase in other liabilities 12,614 3,864 6,509
Net cash provided by
operating activities 19,703,378 18,720,533 17,303,347
Investing activities:
Investment in PIMs (1,003,676) - (5,824,611)
Investment in Additional Loans - (465,000) -
Prepayment on Additional Loan 2,860,000 1,265,000 -
Principal collections on MBS 9,192,319 4,775,477 7,427,029
Principal collections on PIMs 12,722,410 1,800,237 1,633,902
Acquisition of MBS - - (591,600)
Increase (decrease) in deferred income
on Additional Loans (36,362) 1,173,651 555,432
Net cash provided by
investing activities 23,734,691 8,549,365 3,200,152
Financing activity:
Dividends (38,947,582) (22,964,399) (22,964,401)
Net increase (decrease) in cash and
cash equivalents 4,490,487 4,305,499 (2,460,902)
Cash and cash equivalents, beginning
of period 13,520,091 9,214,592 11,675,494
Cash and cash equivalents, end of
period $18,010,578 $13,520,091 $ 9,214,592
Supplemental disclosure of noncash investing activities:
Reclassification of investments in a
PIM and PIMI to an MBS $ - $15,093,814 $ -
The accompanying notes are an
integral part of the
financial statements.
</TABLE>
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
A. Organization
Krupp Government Income Trust II (the "Trust") was formed on February 8,
1991 by filing a Declaration of Trust in The Commonwealth of
Massachusetts. The Trust is authorized to sell and issue not more than
25,000,000 shares of beneficial interest (the "Shares"). The Trust was
organized for the purpose of investing in commercial and multi-family
loans and mortgage backed securities. Berkshire Mortgage Advisors
Limited Partnership (the AAdvisor@) acquired 10,000 of such Shares for
$200,000 and 18,315,158 Shares were sold for $365,686,058 net of
purchase volume discounts of $617,102 under a public offering which
commenced on September 11, 1991 and was completed on February 12, 1993.
Under the Dividend Reinvestment Plan ("DRP"), 46,319 Shares were sold
for $880,061. The Trust shall terminate on December 31, 2030, unless
earlier terminated by the affirmative vote of holders of a majority of
the outstanding Shares entitled to vote thereon.
B. Significant Accounting Policies
The Trust uses the following accounting policies for financial reporting
purposes:
MBS
The Trust accounts for its MBS in accordance with the Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (AFAS 115"), under the classification of
available-for-sale. The Trust carries its MBS at fair market value
and reflects any unrealized gains (losses) as a separate component of
Shareholders' Equity. The Trust amortizes purchase premiums or
discounts over the life of the underlying mortgages using the
effective interest method.
Effective January 1, 1998, the Trust adopted "Statement of Financial
Accounting Standards No. 130, 'Reporting Comprehensive Income'" (FAS
130), was issued establishing standards for reporting and displaying
comprehensive income and its components. FAS 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. FAS
130 had no material effect on the Trust's financial position or
results of operations.
The Federal Housing Administration insured mortgages are carried at
amortized cost 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, AAccounting by Creditors for Impairment of a Loan,@ and
Financial Accounting Standard No. 118, AAccounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. The Trust
holds non-participating mortgage loans insured by the Federal
Housing Administration and carries them at amortized cost.
PIMs and PIMIs
The Trust accounts for its MBS portion of a PIM or PIMI investment in
accordance with FAS 115, under the classification of held to
maturity. The Trust carries these MBS at amortized cost.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
B. Significant Accounting Policies, Continued
PIMs and PIMIs, continued
The Federal Housing Administration Participating Insured Mortgages
and all Additional Loans are carried at amortized cost 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, AAccounting by Creditors for
Impairment of a Loan,@ and Financial Accounting Standard No. 118,
AAccounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures.@
Basic interest is recognized based on the stated rate of the
Department of Housing and Urban Development ("HUD") insured mortgage
(less the servicer's fee) or the stated coupon rate of the Fannie Mae
MBS. The Trust recognizes interest related to the participation
features as earned and when it deems these amounts to be collectible.
The Trust defers the recognition of Additional Loan interest payments
as income to the extent these interest payments are from escrows
established with the proceeds of the Additional Loan. When the
properties underlying the PIMIs generate sufficient cash flow from
operations to make the required interest payments under the
Additional Loans, the Trust has and will commence amortizing the
deferred interest payments into income over the remaining estimated
term of the Additional Loan. During periods where mortgage loans are
impaired the trust suspends amortizing interest income.
Impaired Mortgage Loans
Impaired loans are those loans which the Advisor believes that the
collection of all amounts due in accordance with the contractual
terms of the loan agreement are not likely. Impaired loans are
measured based on the fair value of the underlying collateral.
Interest received on the impaired loans is generally applied against
the loan principal or as interest income if deemed collectable by the
Advisor.
Cash Equivalents
The Trust includes all short-term investments with maturities of
three months or less from the date of acquisition in cash and cash
equivalents. The Trust invests its cash primarily in commercial paper
and money market funds with a commercial bank and has not experienced
any loss to date on its invested cash.
Prepaid Expenses and Fees
Prepaid expenses and fees represent prepaid acquisition fees and
expenses and prepaid participation servicing fees paid for the
acquisition and servicing of PIMs and PIMIs. The Trust amortizes
prepaid acquisition fees and expenses using a method that
approximates the effective interest method over a period of ten to
twelve years, which represents the actual maturity or anticipated
payoff date of the underlying mortgage.
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
B. Significant Accounting Policies, Continued
Prepaid Expenses and Fees, continued
The prepaid participation servicing fees are amortized using a method
that approximates the effective interest method over a ten-year
period beginning at final endorsement of the loan if a HUD-insured
loan and at closing if a Fannie Mae loan.
Income Taxes
The Trust has elected to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended, and believes it will continue to
meet all such qualifications. Accordingly, the Trust will not be
subject to federal income taxes on amounts distributed to
shareholders provided it distributes annually at least 95% of its
REIT taxable income and meets certain other requirements for
qualifying as a REIT. Therefore, no provision for federal income
taxes has been recorded in the financial statements.
Estimates and Assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities, contingent assets and liabilities and revenues and
expenses during the period. Significant estimates include the net
carrying value of Additional Loans and the unrealized gain on MBS
investments. Actual results could differ from those estimates.
C. PIMIs
The Trust had investments in ten PIMIs at December 31, 1998 that provide
financing primarily for multi-family housing. Each PIMI consists of a
Fannie Mae MBS or a sole participation interest in a HUD-insured first
mortgage loan originated under the FHA lending program (collectively,
the "insured mortgages") and an "Additional Loan" made to the borrower
or the owners of the borrower to provide additional funds for the
construction or permanent financing of the property. The FHA first
mortgage loan and the first mortgage underlying the Fannie Mae MBS
provide the borrower with a below market interest rate loan, and in
return, the Trust receives a percentage of the cash generated from the
property operations (AParticipating Income Interest@) and a percentage
of any appreciation of the underlying property to a preferred return,
then a percentage of any appreciation thereafter (AParticipating
Appreciation Interest@) (collectively the "participation income@). The
borrower conveys the participation features to the Trust through a
subordinated promissory note and mortgage or a subordinate loan
agreement (collectively the "Agreements"). The Trust makes the
Additional Loan under the Fannie Mae PIMIs directly to the borrower of
the first mortgage loan underlying the Fannie Mae MBS, and the borrower
collateralizes the Additional Loan with a subordinated mortgage on the
property.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued
The owners of the borrower also pledge their ownership interests in the
borrower as additional collateral. The Trust made the Additional Loans
of the FHA PIMIs to the owners of the entity having the FHA first
mortgage loan, and the owners collateralize the Additional Loan by
pledging their ownership interests in the borrowing entity, their share
of any distributions received, and the proceeds realized upon the
refinancing of the property, sale of the property or sale of the
partnership interests. Unlike the insured mortgages, the Additional
Loans are neither guaranteed nor insured.
The Trust receives monthly payments of principal and interest payments
on the insured mortgages and is also entitled to receive participation
income and semi-annual interest payments ("Additional Loan interest")
and preferred interest under the Additional Loans and Agreements. While
principal and interest payments on the insured mortgages are insured or
guaranteed, there are limitations to the amount and obligation to pay
interest under the Additional Loan and Agreements.
The Agreements for Fannie Mae PIMIs entitles the Trust to receive (i)
semi-annual interest payments on the Additional Loan, (ii) Participating
Income Interest, (iii) Participating Appreciation Interest and (iv)
Preferred Interest. Additional Loan interest accrues at the stated
interest rate of the Additional Loan and Participating Income Interest
represents the Trust's share of the net revenue generated by the
property at a stated percentage generally ranging from 25% to 35%.
Additional Loan interest and Participating Income Interest are payable
only to the extent there is net revenue available to pay these amounts.
However, should the borrower be unable to make the full Additional Loan
interest payment, the borrower must notify the Trust of the amount of
the shortfall. The Trust can require the partners of the borrower to
make a capital call contribution to the borrower to fund 50% of this
shortfall, and the Trust will fund the remainder with an Operating Loan.
Also, the Trust is generally limited to receiving no more than 50% of
net revenue on any semi-annual payment date. Participating Appreciation
Interest provides the Trust with a stated percentage, ranging from 25%
to 30%, of the excess value of the property over amounts due under the
first mortgage, Additional Loan and any Operating Loans, the repayment
of capital call contributions, and a return of original equity to the
partners of the borrower.
Participating Appreciation Interest is due upon the sale, refinancing,
maturity or accelerated maturity, or permitted prepayment of all amounts
due under the insured mortgage and Additional Loan. Generally, the Trust
will not receive more than 50% of the excess of value over the
outstanding indebtedness, the payment of Preferred Interest, and the
return of equity and capital call contributions to the partners of the
borrower.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued
Preferred Interest refers to a non-compounded cumulative return from the
closing date of the loan to the date of calculation, at a stated
interest rate generally on the original outstanding balance of the
insured mortgage plus the Additional Loan and any other funds advanced
to the borrower (reduced by principal payments received) less: (i)
interest payments on the insured mortgage, (ii) Additional Loan
interest, (iii) Participating Income Interest, and (iv) Participating
Appreciation Interest. Generally, the amount of Preferred Interest owed
cannot exceed the excess of value over the outstanding indebtedness.
Amounts due under the Additional Loan and Agreements are neither insured
nor guaranteed.
The Agreements for FHA PIMIs entitle the Trust to receive (i)
Participating Income Interest at a stated percentage usually ranging
from 25% to 50% of (a) all distributable Surplus Cash generated by the
property as defined in the regulatory agreement of the HUD-insured first
mortgage loan, (b) unrestricted cash generated by property operations,
and (c) unexpended reserves and escrows; and (ii) Participating
Appreciation Interest at a stated percentage usually ranging from 20% to
50% of the proceeds or value of the property less the outstanding
indebtedness upon the sale, refinancing, maturity or accelerated
maturity, or permitted prepayment of all amounts due under the insured
mortgage and Additional Loan. Amounts received by the Trust pursuant to
this Agreement reduce amounts payable as Base Interest and Preferred
Interest under the FHA PIMI Additional Loan.
The FHA PIMI Additional Loan interest is payable from the following
sources: (i) any Surplus Cash received as Participating Income Interest,
(ii) amounts conveyed to the Trust by the owners of the borrower
representing distributions of Surplus Cash, and (iii) amounts in reserve
accounts established with Additional Loan proceeds, if available, and
any interest earned on these amounts. As with the Fannie Mae PIMIs, the
borrower must notify the Trust of the amount of any Additional Loan
interest shortfall. At its option the Trust can require the owners of
the borrower to make a capital call for 50% of the shortfall and the
Trust in certain situations could convert the remaining 50% into an
operating loan or would forego the remainder.
The FHA PIMIs also require the payment of Preferred Interest at a stated
interest rate from the date of final endorsement to the date of
calculation on the original outstanding balance of the insured mortgage
plus the Additional Loan and any other funds advanced by the Trust to
the borrower or owners of the borrowing entity (reduced by principal
payments received) less: (i) interest payments paid to the Trust under
the insured mortgage, (ii) Participating Income Interest, and (iii)
interest payments made under the Additional Loan including amounts
foregone by the Trust.
The insured mortgage and Agreements generally have maturities of 15 to
40 years, however, under the Agreements the Trust can accelerate the
maturity dates at any time after the ninth or tenth anniversary of final
endorsement for the FHA PIMIs or the closing date of the Fannie Mae
PIMIs, upon giving twelve months written notice for the payment.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued
If the Trust accelerates the maturity date, the Trust can require
payment of all amounts due under the Additional Loan and Agreements
through the accelerated maturity date for the payment of amounts due
under the Agreement and the HUD-insured first mortgage loan (providing
the contract of insurance with the Secretary of HUD is canceled prior to
the accelerated maturity date) or prepayment of the first mortgage loan
underlying the Fannie Mae MBS.
FHA PIMIs generally cannot be prepaid for a term of five years from the
construction completion date or final endorsement. After the fifth
anniversary of construction completion or final endorsement, the FHA
PIMI may be prepaid without penalty providing that all amounts due under
the Agreements, Additional Loan and FHA insured mortgage are paid.
Fannie Mae PIMIs generally cannot be prepaid during the five years
following the closing date of the underlying first mortgage loan.
Thereafter, the Fannie Mae first mortgage loan may be prepaid subject to
a prepayment penalty that declines each year for the next five years
with no prepayment penalty after the fifth year. Any prepayment of a
Fannie Mae PIMI generally requires prepayment of the first mortgage loan
underlying the Fannie Mae MBS and payment of amounts due under the
Agreements and Additional Loan. The Fannie Mae first mortgage loan would
not need to be prepaid if there is a permitted assumption of the first
mortgage loan, however, amounts due under the Agreement and Additional
Loan would need to be prepaid. Any prepayment usually requires not less
than 90 nor more than 180 days prior written notice.
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 Fannie Mae MBS with a remaining principal balance of
$11,006,015. In addition, the Trust received participation income as
follows: (i) Additional Loan interest payable through the date of sale
of $83,417, (ii) Preferred 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 used these
proceeds to fund a special dividend of $.87 per share to its
Shareholders
During the second quarter of 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 repayment of the $1,265,000 Additional Loan and received all of its
Preferred Interest of $789,336 that was earned as of the date of the
sale. In conjunction with the repayment of the Additional Loan, the
Trust converted the investment from a PIMI to an insured mortgage when
the purchaser assumed the first mortgage.
At December 31, 1998 and 1997 there are no insured mortgage loans within
the Trust's portfolio that are delinquent of principal or interest.
<TABLE>
<CAPTION>
The Trust's investments in PIMIs consists of the following at December 31, 1998
and 1997:
Insured Loan Interest Maturity Balance Outstanding
Mortgages Amount Rate Date at December 31,
1998 1997
FHA
<S> <C> <C> <C> <C> <C>
The Seasons (a) $ 23,224,649 7.875% 10/1/28 $22,450,457 $ 22,626,180
Hunters Pointe 12,789,100 6.875% 1/1/35 12,526,503 12,600,517
Norumbega Point 15,598,500 7.375% 2/1/36 15,397,380 15,471,328
FNMA (b)
Crossings Village 12,907,334 6.75% 10/1/08 12,253,314 12,403,728
Martin's Landing 11,200,000 6.5% 12/1/08 10,622,947 10,756,840
Sunset Summit 10,192,801 6.5% 10/1/08 9,674,470 9,796,408
Oasis 12,401,673 6.75% 7/1/09 11,906,186 12,040,522
Windsor Lake 9,680,344 6.75% 7/1/09 9,287,879 9,394,283
St. Germain 11,772,494 6.75% 1/1/09 - 11,127,209
Windmill Lakes 11,600,000 6.825% 3/1/10 11,193,107 11,313,766
The Lakes 18,387,653 6.825% 7/1/10 17,820,082 18,006,453
$149,754,548 $133,132,325 $145,537,234
(f)
</TABLE>
<TABLE>
<CAPTION>
Base Preferred
Interest Interest
Additional Loan 1998 1997 Rate Rate
<S> <C> <C> <C> <C>
The Seasons (a) $4,925,351 $4,925,351 9%(c) 10%
Hunters Pointe 650,000 650,000 7% 9%
Norumbega Pointe 3,063,000 3,063,000 7% 10%
Crossings Village 2,584,000 2,584,000 7% 9%
Martin=s Landing 2,280,000 2,280,000 7% 12%
Sunset Summit 1,900,000 1,900,000 7% 9%(d)
St. Germain - 2,860,000 7% 8.75%
Oasis 2,290,000 2,290,000 7% 9.25%
Windsor Lake 2,000,000 2,000,000 8% 13%
Windmill Lakes (e) 2,000,000 2,000,000 7.5% 9.5%
The Lakes 4,600,000 4,600,000 7% 9%
$26,292,351 $29,152,351
</TABLE>
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
(a) The total PIM and Additional Loan on this property are
$32,300,000 and $6,850,000, respectively, of which 28% is held by
Krupp Government Income Trust, an affiliate of the Advisor of the
Trust.
(b) Monthly principal and interest payments are based on a 30-year
amortization. The unpaid principal balances due at maturity are
as follows:
Crossings Village $ 9,917,000
Martin's Landing $ 8,524,000
Sunset Summit $ 7,763,000
Oasis $ 9,550,000
Windsor Lake $ 7,517,000
Windmill Lakes $ 8,907,000
The Lakes $14,118,000
(c) The base interest rate was 6% per annum for the first three
years and beginning September 1, 1996 increased to 9% per annum.
(d) The Trust will receive its Additional Loan Interest and its GIT
Contingent Interest on Investment (as defined in the Subordinate
Loan Agreement) from net revenue up to the 9% Preferred Interest
Rate and, thereafter is entitled to 25% of net revenue.
(e) As of December 31, 1997 Windmill Lakes was in technical default
on its Additional Loan for not making the full required base
interest payment due on the Additional Loan. The Advisor is
reviewing the property=s operating results to determine whether
an operating loan may be required.
(f) The aggregate cost for federal income tax purposes is $133,132,325.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued
Impaired Mortgage Loans
On December 31, 1998, as a result of continued deterioration in property
operations, the Advisor of the Trust determined that the Windmill Lakes
Additional Loan was impaired. As a result, a valuation allowance of $2.0 million
has been established to adjust the carrying amount of the loan to the estimated
fair market value of the collateral less anticipated costs of sale. The Trust
did not recognize interest income on the Windmill Lakes Additional Loan during
1998.
On December 31, 1998, as a result of continued deterioration in property
operations, the Advisor of the Trust determined that the Oasis Additional Loan
was impaired. As a result, a valuation allowance of $994,000 has been
established to adjust the carrying amount of the loan to the estimated fair
market value of the collateral less anticipated costs of sale. The Trust did not
recognize interest income on the Oasis Additional Loan during 1998.
The activity in the valuation allowance together with the related recorded and
carrying value of the mortgage loans is as follows:
<TABLE>
<CAPTION>
Recorded Valuation Carrying
Value Allowance Value
<S> <C> <C> <C>
Windmill Lakes $2,000,000 $2,000,000 $ -
Oasis 2,290,000 994,000 1,296,000
Balance at December
31, 1998 $4,290,000 $2,994,000 $1,296,000
</TABLE>
The recorded value of the impaired mortgage loans did not differ materially from
the balances reported at the end of each period with exception for the
impairment recorded in the fourth quarter of 1998 for the Windmill Lakes and
Oasis additional loans. The Trust has also deferred income related to Oasis of
$160,300.
<TABLE>
<CAPTION>
Reconciliations of activity for 1998, 1997 and 1996 are as follows:
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $145,537,234 $150,454,030 $150,448,995
Acquisitions - - 1,303,436
Reclassification - (3,515,288) -
Principal collections (12,404,909) (1,401,508) (1,298,401)
Balance at end of period $133,132,325 $145,537,234 $150,454,030
</TABLE>
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued
Property Descriptions:
The Seasons is a 1,088-unit apartment complex located in Laurel,
Maryland.
The Falls at Hunter's Pointe ("Hunters Pointe") is a 276-unit apartment
complex located in Sandy City, Utah, a suburb of Salt Lake City.
Norumbega Point is a 93-unit assisted living facility in Weston,
Massachusetts.
Crossings Village Apartments ("Crossings Village") is a 286-unit
apartment complex located in Westlake, Ohio. Martin's Landing Apartments
("Martin's Landing") is a 300-unit apartment complex in Roswell, Georgia.
Sunset Summit Apartments ("Sunset Summit") is a 261-unit apartment
complex located in Portland, Oregon.
Oasis at Springtree ("Oasis") is a 276-unit apartment complex located
in Sunrise, Florida.
Windsor Lake Apartments ("Windsor Lake") is a 416-unit apartment complex
in Smyrna, Georgia.
St. Germain Apartments ("St. Germain") is a 207-unit apartment complex
in Boston, Massachusetts.
Windmill Lakes Apartments ("Windmill Lakes") is a 264-unit garden
style apartment complex in Pembroke Pines, Broward County, Florida.
The Lakes at Vinings Apartments ("The Lakes") is a 464-unit garden and
townhouse style apartment complex in Vinings, Georgia.
D. PIMs
The Trust has investments in four PIMs. The Trust's PIMs consist of a
Fannie Mae MBS which represents the securitized first mortgage loan on
the underlying property or a sole participation interest in the first
mortgage loan originated under the FHA lending program on the underlying
property (collectively the "insured mortgages") and participation
interests in the revenue stream and appreciation of the property above
specified levels. The borrower conveys these participation features to
the Trust generally through a subordinated promissory note and mortgage
(the "Agreement"). The Trust receives monthly principal and interest
payments on the Fannie Mae MBS guaranteed by Fannie Mae, and HUD insures
payment of principal and interest on the FHA first mortgage loan.
The borrower generally cannot prepay the first mortgage loan during the
first five years and may prepay the first mortgage loan thereafter
subject to a 9% prepayment penalty in years six through nine, a 1%
prepayment penalty in year ten and no prepayment penalty thereafter. The
Trust may receive interest related to its participation interests in the
underlying property, however, these amounts are neither insured nor
guaranteed.
Generally, the participation features consist of the following: (i)
"Minimum Additional Interest" at rates ranging from .5% to .75% per annum
calculated on the unpaid principal balance of the first mortgage on the
underlying property, (ii) "Shared Income Interest" ranging from 25% to
30% of the monthly gross rental income generated by the underlying
property in excess of a specified base, but only to the extent that it
exceeds the
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
D. PIMs, Continued
amount of Minimum Additional Interest received during such month, (iii)
"Shared Appreciation Interest" ranging from 25% to 30% of any increase in
value of the underlying property in excess of a specified base. Payment
of participation income from the operations of the property is limited to
50% of net revenue or surplus cash as defined by Fannie Mae or HUD,
respectively. The total amount of participation income payable by the
underlying borrower generally cannot exceed 50% of any increase in value
of the property, however, generally any net proceeds from a sale or
refinancing will be available to satisfy any accrued but unpaid Minimum
Additional or Shared Income Interest.
Shared Appreciation Interest is payable when one of the following occurs:
(1) the sale of the underlying property to an unrelated third party on a
date which is later than five years from the date of the Agreement, (2)
the maturity date of the Agreement, or (3) prepayment of the Agreement.
Under the Agreement, the Trust, upon giving twelve months written notice,
can accelerate the maturity date of the Agreement and insured mortgage to
a date not earlier than ten years from the date of the Agreement for (a)
the payment of all participation interest due under the Agreement as of
the accelerated maturity date or (b) the payment of all participation
interest due under the Agreement plus all amounts due on the first
mortgage note on the property.
During the fourth quarter of 1997, the borrower on the Estates PIM sold
the property 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 required the borrower to pay a settlement of
$232,000 to provide the Trust with a financial return comparable to what
the Trust would have expected to receive had the borrower continued to
own the property. In conjunction with this transaction, the Trust
converted the investment from a PIM to an insured mortgage.
During the second quarter of 1998, the Trust completed the funding of
its commitment on the Fountains PIM.
At December 31, 1998 and 1997 there are no insured mortgage loans within
the Trust=s portfolio that are delinquent of principal or interest. The
Trust's PIMs consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Interest Maturity
PIM Amount Rate Date Balance at December 31,
1998 1997
FNMA
<S> <C> <C> <C> <C> <C>
Mequon Trails $14,937,726 6.50% 1/01/08 $13,971,630 $14,170,803
(a)
FHA
Rivergreens II 6,137,199 7.375% 1/1/35 6,026,715 6,058,069
Mill Ponds II 8,245,300 7.125% 12/1/35 8,127,964 8,169,935
The Fountains 10,336,000 7.875% 11/1/36 10,204,948 9,246,275
(b)
Total $39,656,225 $38,331,257 $37,645,082
(c)
</TABLE>
C. PIMs, Continued
(a) Principal and interest payments are based on a 30-year amortization.
Unpaid principal of approximately $11,267,000 is due at maturity.
(b) Construction-phase interest rate was 7.875%. Received Final Endorsement in
April 1998. (c) The aggregate cost for federal income tax purposes is
$38,331,257.
<TABLE>
<CAPTION>
Reconciliations of activity for 1998, 1997 and 1996 are as follows:
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $37,645,082 $49,622,337 $45,436,663
Acquisitions 1,003,676 - 4,521,175
Reclassification - (11,578,526) -
Principal collections (317,501) (398,729) (335,501)
Balance at end of period $38,331,257 $37,645,082 $49,622,337
Property descriptions:
</TABLE>
Mequon Trails Townhomes ("Mequon Trails") is a 246-unit apartment
complex located in Mequon, Wisconsin. Rivergreens II Apartments
("Rivergreens II") is a 126-unit apartment complex in Gladstone, Oregon.
Mill Ponds II Apartments ("Mill Ponds II")is a 150-unit apartment
complex in Bellbrook, Ohio. The Fountains Apartments ("The Fountains")
is a 204-unit apartment complex in West Des Moines, Iowa.
E. Mortgage Backed Securities
At December 31, 1998, the Trust's MBS portfolio has an amortized cost of
$41,286,963 and gross unrealized gains and losses of approximately
$556,799 and $9,563, respectively. At December 31, 1997, the Trust's MBS
portfolio has an amortized cost of approximately $50,664,558 and gross
unrealized gains and losses of approximately $547,435 and $40,692,
respectively. The MBS have maturities ranging from 2008 to 2023.
F. Shareholders' Equity
Under the Declaration of Trust, and commencing with the initial closing
of the public offering of Shares, the Trust has declared and paid
dividends on a quarterly basis.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
F. Shareholders' Equity, continued
During the period in which the Trust qualifies as a REIT, the Trust has
and will pay quarterly dividends aggregating at least 95% of taxable
income on an annual basis to be allocated to the shareholders, in
proportion to their respective number of shares. In order for the Trust
to maintain its REIT status with respect to the requirements of Share
ownership, the Declaration of Trust prohibits any investor from owning,
directly or indirectly more than 9.80% of the outstanding Shares and
empowers the Trustees to refuse to permit any transfer of Shares which,
in their opinion, would jeopardize the status of the Trust as a REIT.
G. Related Party Transactions
Under the terms of the Advisory Service Agreement, the Advisor receives
an Asset Management Fee equal to .75% per annum of the value of the
Trust's actual and committed invested assets payable quarterly.
The Trust also reimburses affiliates of the Advisor for certain expenses
incurred in connection with maintaining the books and records of the
Trust and the preparation and mailing of financial reports, tax
information and other communications to investors.
The Trust earned or received $443,282, $1,024,097, and $295,522 of base
interest from The Seasons in 1998, 1997 and 1996, respectively (see Note
C). In addition, the Trust received $239,107 in 1998 and $83,360 in 1997
related to participating interest income.
H. Federal Income Taxes
The reconciliation of the income reported in the accompanying statement
of income with the income reported in the Trust's 1998 federal income tax
return follows:
Net income per statement of income $ 13,183,111
Add: Provision for impaired mortgage loan 2,994,000
Book to tax difference for amortization
of prepaid fees and expenses 625,370
Less: Additional Loan interest deferred for book
purposes (215,433)
Net income for federal income tax purposes $ 16,587,048
The Trust paid dividends of $2.12 per share during 1998 which represents
approximately $ .90 from ordinary income and $1.22 represents a
non-taxable distribution for federal income tax purposes.
The basis of the Trust=s assets for financial reporting purposes is less
than its tax basis by approximately $8,347,000 and $4,728,000 at
December 31, 1998 and 1997, respectively. The basis of the Trust=s
liabilities for financial reporting purposes exceeded its tax basis by
approximately $2,289,000 and $2,545,000 at December 31, 1998 and 1997,
respectively.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
I. Fair Value Disclosures of Financial Instruments
The Trust uses the following methods and assumptions to estimate the
fair value of each class of financial instrument:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
MBS
The Trust estimates the fair value of MBS based on quoted market
prices.
Insured mortgage loans are valued in a manner consistent with the
PIM and PIMI's as described below.
PIMs and PIMIs
There is no established trading market for these investments.
Management estimates the fair value of the PIMs and the insured
mortgage portion of the PIMIs using quoted market prices of MBS
having the same stated coupon rate as the insured mortgages.
Additional Loans are based on the estimated fair value of the
underlying properties. Management does not include any participation
income in the Trust=s estimated fair values, because Management does
not believe it can predict the time of realization of the feature
with any certainty.
Based on the estimated fair value determined using these methods and
assumptions, the Trust's investments in PIMs and PIMIs had gross
unrealized gains of approximately $2,872,000 at December 31, 1998
and gross unrealized losses of approximately $1,049,000 at
December 31, 1997.
Commitments to Fund Construction Loans and PIMIs
For the year ended December 31, 1997 the Trust approximated the fair
value of its commitment on The Fountains PIM to be equal to the
commitment amount of approximately $1,006,000.
At December 31, 1998 and 1997, the estimated fair values of the
Trust's financial instruments are as follows:
(rounded to thousands)
1998 1997
Fair Carrying Fair Carrying
Value Value Value Value
Cash and cash equivalents $ 18,011 $ 18,011 $ 13,520 $ 13,520
MBS 41,834 41,834 51,171 51,171
PIMs and PIMIs:
PIMs 39,056 38,331 37,534 37,645
Insured mortgages 135,279 133,132 144,599 145,537
Additional loans 23,298 23,298 29,152 29,152
$257,478 $254,606 $275,976 $277,025
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning costs and end of
Description of period expenses Revenues period
Valuation
Allowance $ - $2,994,000 $ - $2,994,000
(1) The Trust recognized a valuation allowance related to the Windmill Lakes and
Oasis Additional Loans.
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
For the Quarter Ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
<S> <C> <C> <C> <C>
Total revenues $5,490,525 $4,777,805 $7,055,166 $4,306,173
Net income $4,286,801 $3,665,671 $5,028,861 $ 201,778
Earnings per Share $ .23 $ .20 $ .27 $ .02
For the Quarter Ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Total revenues $5,306,978 $5,057,310 $6,072,765 $4,853,502
Net income $4,012,616 $3,822,465 $4,788,267 $3,640,137
Earnings per Share $ .22 $ .21 $ .26 $ .20
</TABLE>
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,010,578
<SECURITIES> 236,596,132<F1>
<RECEIVABLES> 1,682,882
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,120,406<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 267,409,998
<CURRENT-LIABILITIES> 2,762,906<F3>
<BONDS> 0
0
0
<COMMON> 264,099,856
<OTHER-SE> 547,236<F4>
<TOTAL-LIABILITY-AND-EQUITY> 267,409,998
<SALES> 0
<TOTAL-REVENUES> 21,629,669<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,446,558<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,183,111
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,183,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,183,111
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Participating Insured Mortgage Investments (PIMIs) (insured
mortgages of $133,132,325 and Additional Loans of $23,298,351), Participating
Insured Mortgages(PIMs)of $38,331,257 and Mortgage-backed Securities (MBS) of
$41,834,199.
<F2> Includes prepaid acquisition fees and expenses of $15,457,112 net of
accumulated amortization of $7,167,563 and prepaid participation servicing fees
of $5,152,370 net of accumulated amortization of $2,321,513.
<F3> Includes deferred income on Additional Loans of $2,719,343.
<F4> Unrealized gain on MBS.
<F5> Represents interest income on investments in mortgages and cash.
<F6> Includes $2,994,000 for impaired mortgage loans and $2,900,106 of
amortization of prepaid fees and expenses.
</FN>
</TABLE>
