UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-20164
Krupp Government Income Trust II
Massachusetts 04-3073045
(State or other
jurisdiction of (IRS employer
incorporation or organization) identification no.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal
executive offices) (Zip Code)
(617) 523-0066
(Registrant's
telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
BALANCE SHEETS
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
<S> <C> <C>
Insured mortgages $132,796,944 $133,132,325
Additional loans, net of impairment provision
of $2,994,000 23,298,351 23,298,351
Participating Insured Mortgages ("PIMs")
(Note 2) 38,249,402 38,331,257
Mortgage-Backed Securities and insured
mortgage loans ("MBS")
(Note 3) 38,465,039 41,834,199
Total mortgage investments 232,809,736 236,596,132
Cash and cash equivalents 20,335,060 18,010,578
Prepaid acquisition fees and expenses, net of
accumulated amortization of $7,538,891 and
$7,167,563, respectively 7,918,221 8,289,549
Prepaid participation servicing fees, net of
accumulated amortization of $2,440,513 and
$2,321,513, respectively 2,711,857 2,830,857
Interest receivable and other assets 1,296,793 1,682,882
Total assets $ 265,071,667 $267,409,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 2,781,780 $ 2,719,343
Other liabilities 38,958 43,563
Total liabilities 2,820,738 2,762,906
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 261,739,798 264,099,856
Accumulated comprehensive income 511,131 547,236
Total Shareholders' equity 262,250,929 264,647,092
Total liabilities and Shareholders' equity $265,071,667 $267,409,998
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME
<CAPTION>
For the Three Months
Ended March 31,
1999 1998
Revenue:
Interest income - PIMs and PIMIs:
<S> <C> <C>
Basic interest $ 3,010,589 $3,136,987
Additional loan interest 528,028 511,987
Participation income (Note 5) - 694,354
Interest income - MBS 642,107 958,292
Interest income - other 229,496 188,905
Total revenue 4,410,220 5,490,525
Expenses:
Asset management fee to an affiliate 436,223 484,951
Expense reimbursements to affiliates 39,423 108,483
Amortization of prepaid fees and expenses 490,328 525,668
General and administrative 63,205 84,622
Total expenses 1,029,179 1,203,724
Net income $ 3,381,041 $4,286,801
Basic earnings per Share $ .18 $ .23
Weighted average Shares outstanding 18,371,477 18,371,477
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
<CAPTION>
For The Three Months Ended
March 31,
1999 1998
Operating activities:
<S> <C> <C>
Net income $ 3,381,041 $ 4,286,801
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 62,968 27,370
Amortization of prepaid fees and expenses 490,328 525,668
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 386,089 466,863
Increase (decrease) in other liabilities (4,605) 2,873
Net cash provided by operating activities 4,315,821 5,309,575
Investing activities:
Principal collections on MBS 3,270,087 1,300,049
Principal collections on PIMs
and insured mortgages 417,236 437,285
Increase in deferred income
on Additional Loans 62,437 (169,563)
Net cash provided by investing activities 3,749,760 1,567,771
Financing activity:
Dividends (5,741,099) (5,741,100)
Net increase in cash and cash equivalents 2,324,482 1,136,246
Cash and cash equivalents, beginning of period 18,010,578 13,520,091
Cash and cash equivalents, end of period $20,335,060 $14,656,337
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this report on Form 10-Q pursuant to the Rules
and Regulations of the Securities and Exchange Commission. However, in the
opinion of Berkshire Mortgage Advisors Limited Partnership, the AAdvisor@ to
Krupp Government Income Trust II (the "Trust"), the disclosures contained in
this report are adequate to make the information presented not misleading. See
Notes to Financial Statements in the Trust's Form 10-K for the year ended
December 31, 1998 for additional information relevant to significant accounting
policies followed by the Trust.
In the opinion of the Advisor of the Trust, the accompanying unaudited financial
statements reflect all adjustments (consisting primarily of normal recurring
accruals) necessary to present fairly the Trust's financial position as of March
31, 1999 and the results of its operations and its cash flows for the three
months ended March 31, 1999 and 1998.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results, which may be expected for the full year.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
2. PIMs and PIMIs
At March 31, 1999, the Trust=s PIMs and PIMIs have a fair value of approximately
$196,989,000 and gross unrealized gains of approximately $2,644,000. The PIMs
and PIMIs have maturities ranging from 2008 to 2036. At March 31, 1999 there are
no insured mortgage loans within the Trust=s portfolio that are delinquent of
principal or interest.
Windmill Lakes and Oasis have been adversely affected by a competitive housing
market in their South Florida area. As a result, at March 31, 1999 their
respective borrowers are in technical default for not making the full required
base interest payments due on their respective Additional Loan. The Advisor is
currently monitoring these properties and assessing the feasibility of extending
debt service relief to these borrowers until the market stabilizes.
3. MBS
At March 31, 1999, the Trust's MBS portfolio has an amortized cost of
$37,953,908 and gross unrealized gains and losses of approximately $541,914 and
$30,783, respectively. The MBS portfolio has maturities ranging from 2008 to
2023.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Shareholder's Equity
A summary of changes in Shareholders' equity for the three months ended
March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Accumulated
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $264,099,856 $ - $ 547,236 $264,647,092
Net income - 3,381,041 - 3,381,041
Dividends (2,360,058) (3,381,041) (5,741,099)
Change in unrealized
gain on MBS - - (36,105) (36,105)
Balance at March 31, 1999 $261,739,798 $ - $ 511,131 $262,250,929
</TABLE>
5. Related Party Transactions
During the three months ended March 31, 1999 and 1998, the Trust earned $221,641
and $221,641, respectively, of interest on an Additional Loan with an affiliate
of the Advisor. In addition, the Trust received $68,456 of participation
interest income for the three months ended March 31, 1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
The Advisor of the Trust 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,
upgraded the computer hardware and software during 1997 and 1998. As a result,
the Advisor has generated operating efficiencies and believes the financial
accounting operating systems are Year 2000 ready.
The Advisor of the Trust is 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 surveying these third party
providers and assessing their Year 2000 readiness. 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. No estimate can be
made at this time as to the impact of the readiness of such third parties.
Liquidity and Capital Resources
At March 31, 1999 the Trust has significant liquidity consisting of cash and
cash equivalents, of approximately $20.3 million as well as the cash inflows
provided by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also
receive additional cash flow from the participation features of its PIMs and
PIMIs. The Trust anticipates that these sources will be adequate to provide the
Trust with sufficient liquidity to meet its obligations, including providing
dividends to its investors.
The most significant demand on the Trust's liquidity is the quarterly dividends
paid to investors of approximately $5.7 million. 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 paid by the Trust come from interest
income received on PIMs, PIMIs, MBS and cash and cash equivalents net of
operating expenses, and the principal collections received on PIMs, PIMIs and
MBS. The portion of the dividends funded from principal collections reduces the
capital resources of the Trust. As the capital resources of the Trust decrease,
the total cash flows to the Trust will also decrease which will result in
periodic adjustments to the dividends paid to the investors.
<PAGE>
The Advisor of the Trust periodically reviews the dividend rate to determine
whether an adjustment to the dividend rate is necessary based on projected
future cash flows. Based on current projections, the Advisor believes the Trust
can maintain the current dividend rate for the foreseeable future. In general,
the Advisor tries to set a dividend rate that provides for level quarterly
distributions. To the extent quarterly dividends do not fully utilize the cash
available for distribution and cash balances increase, the Advisor may adjust
the dividend rate or distribute such funds through a special distribution.
The Trust's investments in PIMs and PIMIs, in addition to providing guaranteed
or insured monthly principal and interest payments, may provide the Trust with
additional income through participation in the cash generated by the operations
of the underlying properties and a portion of the appreciation realized upon the
sale or refinancing of the underlying properties. The Trust's participation
interests and the interest payments on the Additional Loan portion of the PIMIs
are neither insured nor guaranteed and will depend primarily on the successful
operation of the underlying properties.
Most of the properties underlying the Trust=s PIMs and PIMIs generate sufficient
operating revenues to adequately maintain the property, service the debt and pay
participating interest to the Trust. However, the operating performance of
Windmill Lakes and Oasis at Springtree in South Florida have continued to be
adversely affected by the highly competitive housing market, and the respective
borrowers are currently delinquent on their obligations on their Additional
Loans. The Advisor is monitoring these properties and currently assessing the
feasibility of extending debt service relief to these borrowers until the market
stabilizes.
For the first five years of the PIMs and PIMIs the borrowers are generally
prohibited from prepaying. For the second five years, the borrowers can prepay
the loans incurring a prepayment penalty for PIMs or paying all amounts due
under the PIMIs and satisfying the required preferred return. The Trust has the
option of calling certain PIMs and all the PIMIs by accelerating their maturity
if the loans are not prepaid by the tenth year after permanent funding. The
Trust will determine the merits of exercising the call option for each PIM or
PIMI as economic conditions warrant. Such factors as the condition of the asset,
local market conditions, interest rates and available financing will have an
impact on this decision.
Assessment of Credit Risk
The Trust's investments in mortgages are guaranteed or insured by Fannie Mae,
the Federal Home Loan Mortgage Corporation (FHLMC) or the United States
Department of Housing and Urban Development (HUD) and the certainty of cash
flows and the risk of material loss of the amounts invested depends on the
creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. 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 ability to maintain
occupancy levels, control operating expenses, maintain the property 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.
<PAGE>
The Trust includes in cash and cash equivalents approximately $20 million of
commercial paper, which is issued by entities with a credit rating equal to one
of the top two rating categories of a nationally recognized statistical rating
organization.
Operations
The Trust's net income decreased $906,000 ($.05 per Share) during the first
quarter of 1999 as compared to the first quarter of 1998 due primarily to lower
participation income, interest income on MBS and basic interest on PIMs and
PIMIs, which was partially offset by a $175,000 decrease in Trust expenses.
During the first quarter of 1999 the Trust did not receive any participation
income, but in the first quarter of 1998 the Trust received $694,000 of
participation income consisting of $232,000 from a participation income
settlement from the 1997 sale of the property underlying The Estates PIM,
$265,000 of participation income from the St. Germain PIMI and participation
income from four other PIMIs totaling $197,000. Interest income on MBS decreased
$316,000 in 1999 as compared to 1998 due to significant principal collections
reducing the MBS investment balance. Basic interest income on PIMs and PIMIs
decreased during the first quarter of 1999 as compared to 1998 due primarily to
the prepayment of the St. Germain PIMI in the third quarter of 1998. The
decrease in Trust expenses represents a $69,000 decrease in expense
reimbursements to affiliates due in part to $40,000 rebate related to 1998
expense reimbursements; a $49,000 decrease in asset management fees resulting
from principal collections, including the St. Germain prepayment, reducing the
Trust's mortgage investments; and a $35,000 decrease in amortization expense
resulting from fully amortizing the remaining prepaid fees and expenses
associated with the St. Germain PIMI in 1998.
As principal collections reduce the Trust's investments in MBS, PIMs and insured
mortgages, interest income on MBS and basic interest income on PIMs and PIMIs
will decline. The Trust funds a portion of dividends with principal collections,
which will continue to reduce the assets of the Trust thereby reducing the
income generated by the Trust in the future. Additionally, asset management fees
will decrease as the Trust's investments in MBS, PIMs and insured mortgages
continue to decline as a result of principal collections.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Response: None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Krupp Government Income Trust II
(Registrant)
BY: /s/Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer
of Krupp Government Income Trust II.
DATE: April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
balance sheet and statement of income and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000872467
<NAME> Krupp Government Income Trust II
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
<CASH> 20,335,060
<SECURITIES> 232,809,736<F1>
<RECEIVABLES> 1,296,793
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,630,078<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 265,071,667
<CURRENT-LIABILITIES> 2,820,738<F3>
<BONDS> 0
0
0
<COMMON> 261,739,798
<OTHER-SE> 511,131<F4>
<TOTAL-LIABILITY-AND-EQUITY> 265,071,667
<SALES> 0
<TOTAL-REVENUES> 4,410,220<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,029,179<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,381,041
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,381,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,381,041
<EPS-PRIMARY> .18
<EPS-DILUTED> 0
<FN>
<F1> Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $132,796,944 and Additional Loans of $23,298,351)
Participating Insured Mortgages ("PIMs") of $38,249,402 and Mortgage-backed
Securities ("MBS") of $38,465,039.
<F2> Includes prepaid acquisition fees and expenses of $15,457,112 net of
accumulated amortization of $7,538,891 and prepaid participation servicing
fees of $5,152,370 net of accumulated amortization of $2,440,513.
<F3> Includes deferred income on Additional Loans of $2,781,780.
<F4> Unrealized gain on MBS.
<F5> Represents interest income on investments in mortgages and cash.
<F6> Includes $490,328 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
