<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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, 1999
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 (IRS Employer Identification No.)
of incorporation or organization)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
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 12-18.
<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.
<PAGE>
The Trust's investments are not expected to be subject to seasonal fluctuations,
although net income may vary somewhat from quarter to quarter based upon the
participation features of its investments. 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, 1999, 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, 1999 was approximately
14,248.
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 1999 and 1998 and has established a dividend rate of $.24 per
Share per quarter for 2000.
<PAGE>
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)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total revenues $ 19,613 $ 21,630 $ 21,291 $ 19,877 $ 20,033
Net income $ 14,974 $ 13,183 $ 16,263 $ 14,999 $ 13,747
Net income per Share $ .82 $ .72 $ .89 $ .82 $ .75
Weighted average Shares
outstanding 18,371 18,371 18,371 18,371 18,371
Total assets at December 31 $ 231,209 $ 267,410 $ 293,158 $ 298,297 $ 306,965
Average dividends per Share $ 2.73 $ 2.12 $ 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.
Impact of the Year 2000 Issue
Starting in 1997 the Advisor conducted an assessment of the Trust's core
internal and external computer information systems to understand the nature and
extent of work required to make its systems Year 2000 ready. The Year 2000
readiness issue was concerned with the inability of computerized information
systems to accurately calculate, store or use a date after 1999. The Advisor
believed that a system failure or miscalculation could cause disruptions of
operations.
As a result of this concern, the Advisor, along with certain affiliates,
upgraded their computer systems including their hardware and software so they
would be Year 2000 ready. In addition, the Advisor surveyed the Trust's material
third-party service providers and significant vendors and received assurances
that they were Year 2000 ready. The Advisor also developed contingency plans for
all of its "mission-critical functions" to insure business continuity. As a
result of these efforts and the efforts of third parties, the Year 2000 did not
result in any disruption of activities to the Trust.
Liquidity and Capital Resources
At December 31, 1999 the Trust had liquidity consisting of cash and cash
equivalents, of approximately $8.7 million as well as the cash inflows provided
by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also receive
additional cash flow from the participation features of its PIMs and PIMIs. The
Trust anticipates that these sources will be adequate to provide the Trust with
sufficient liquidity to meet its obligations, including providing dividends to
its investors.
The most significant demand on the Trust's liquidity is quarterly dividends,
including liquidating dividends, paid to investors of approximately $4.4
million, and special distributions. Funds for dividends come from interest
income received on PIMs, PIMIs, MBS and cash and cash equivalents net of
operating expenses, and the principal collections received on PIMs, PIMIs and
MBS. The portion of dividends funded from principal collections reduces the
capital resources of the Trust. As the capital resources of the Trust decrease,
the total cash flows to the Trust will also decrease which may result in
periodic adjustments to the dividends paid to the investors.
<PAGE>
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 presented the Board of Trustees with a proposal to
reduce the dividend rate to $.24 per Share per quarter commencing in February
2000 and to pay a special distribution of $.80 per Share in December 1999. The
Board of Trustees approved the new rate and payment of the special distribution
at their quarterly meeting in November. 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.
During 1999, the Trust received the full Additional Loan interest payment from
eight of its ten PIMI investments, six of which made the payments from operating
cash flow. Oasis and Windmill Lakes did not pay any Additional Loan interest
during 1999. During 1999, the Trust received participation income from four of
its investments, totaling $799,024. Mill Pond paid $18,928; Crossings Village
paid $112,500; Sunset Summit paid $274,780; and The Seasons paid $392,816. The
Advisor expects that these same properties will pay participation income during
2000 as well as Martins Landing, The Lakes and Mequon.
Most properties had stable operating results during 1999. High occupancy rates
were maintained and moderate rental income increases were achieved at many of
the properties due to stable or improving markets. Generally, all of the
properties the Trust expects to receive participation income from during 2000
have been occupied in the mid 90% range most of the year. Two other properties,
Norumbega and Fountains, also have been occupied in the high 90% range, but have
not generated sufficient Surplus Cash under HUD's definition to be able to pay
the Trust any participation income. Rivergreens II occupancy has improved during
1999, finishing the year with occupancy in the high 90% range despite
challenging market conditions.
One property, Windsor Lake, was sold during 1999 and the Trust received a
prepayment of the Insured Mortgage and the Additional Loan as well as
participation income based on the increased value of the asset as determined by
the sales price.
Occupancy and operating results of the three remaining properties are closely
monitored by the Advisor and warrant mention. The borrower on the PIMI for the
Falls at Hunters Point is in monetary default for non-payment of participation
income that is payable to the Trust based on 1997 operating results. The Advisor
is currently pursuing remedies to collect the delinquent participation income.
The borrowers on the PIMIs for Oasis at Springtree and Windmill Lakes have both
sought debt service relief on the Additional Loan due to the highly competitive
market in Broward County, Florida, where both properties are located. 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 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 and has maintained such allowance throughout 1999.
The modification agreement for the debt service relief is currently being
negotiated between the Advisor and the borrower on the Oasis PIMI.
<PAGE>
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 is in the low 80% range. 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. 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, and maintained such allowance
through 1999.
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.
On December 16, 1999, the Trust received $2,832,907 from Windsor Lake;
consisting of $2,000,000 from the payoff of the additional loan, $40,000 of base
interest on the Additional Loan, and $792,907 of participating appreciation
interest income. The payoff of the balance on the insured mortgage, $9,172,642
paid off on January 26, 2000. The Trust will pay a special dividend of $.66 per
Share from the prepayment proceeds.
On October 18, 1999, the Trust received a payoff of $12,399,164 from the Estates
MBS consisting of a first mortgage of $11,375,380 and a prepayment premium of
$1,023,784. During October 1999, the Trust paid a special dividend of $.68 per
Share from the proceeds received from the Estates MBS payoff.
During 1998, the Trust received the prepayment of the St. Germain PIMI
investment when the property was refinanced. The 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 Additional Loan interest $83,417. In addition, the Trust
received participation income comprised of the outstanding preferred return on
the Trust's investment of $89,975, participation income interest of $94,258, 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.
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, the Federal Home Loan Mortgage
Corporation (FHLMC) or the Department of Housing and Urban Development (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.
<PAGE>
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 $7.6 million of
Agency paper.
Interest Rate Risk
The Trust's primary market risk exposure is to interest rate risk, which can be
defined as the exposure of the Trust's net income, comprehensive income or
financial condition to adverse movements in interest rates. At December 31,
1999, the Trust's PIMs, PIMIs and MBS comprise the majority of the Trust's
assets. As such, decreases in interest rates may accelerate the prepayment of
the Trust's investments. The Trust does not utilize any derivatives or other
instruments to manage this risk as the Trust plans to hold all of its
investments to expected maturity.
The Trust monitors prepayments and considers prepayment trends, as well as
distribution requirements of the Trust, when setting regular dividend
distribution policy. For MBS, the fund forecasts prepayments based on trends in
similar securities as reported by statistical reporting entities such as
Bloomberg. For PIMs and PIMIs, the Trust incorporates prepayment assumptions
into planning as individual properties notify the Trust of the intent to prepay
or as they mature.
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. For mortgage investments, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. The expected maturity date is contractual maturity
adjusted for expectations of prepayments.
<TABLE>
<CAPTION>
Expected maturity dates ($ in thousands)
2000 2001 2002 2003 2004 Thereafter Total Fair Value
Face
Value
Interest-sensitive assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MBS $ 3,745 $ 2,954 $ 2,333 $ 1,848 $ 1,468 $ 8,980 $ 21,328 $ 21,127
Weighted
Average interest rate 8.09% 8.09% 8.09% 8.09% 8.09% 8.09% 8.09%
PIMS 363 392 422 455 491 35,922 38,045 36,763
Weighted
Average interest rate 7.04% 7.04% 7.05% 7.05% 7.05% 7.05% 7.05%
PIMIS 10,542 1,481 1,602 1,732 1,873 114,521 131,751 127,108
Insured Mortgages
Weighted
Average interest rate 7.02% 7.02% 7.03% 7.03% 7.03% 7.03% 7.03%
Additional Loans - - - - - 24,292 24,292 21,298
Weighted
Average interest rate 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45%
Total Interest-
Sensitive Assets $14,650 $ 4,827 $ 4,357 $ 4,035 $ 3,832 $183,715 $215,416 $206,296
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Operations
(amounts in thousands, except per Share amounts)
Year Ended December 31,
1999 1998 1997
Per Per Per
Amount Share Amount Share Amount Share
Interest on PIMs:
<S> <C> <C> <C> <C> <C> <C>
Basic interest $ 11,998 $ .66 $ 12,450 $ .68 $ 13,828 $ .75
Additional loan interest 1,712 .09 1,581 .09 2,147 .12
Participation income 1,592 .08 3,252 .18 1,770 .10
Interest income on MBS 3,251 .18 3,265 .18 2,847 .16
Interest income - other 1,060 .06 1,082 .06 698 .04
Trust expenses (2,274) (.12) (2,553) (.15) (2,840) (.16)
Provision for impaired mortgage
loans - - (2,994) (.16) - -
Amortization of prepaid fees and
expenses (2,365) (.13) (2,900) (.16) (2,187) (.12)
Net Income $ 14,974 $ .82 $ 13,183 $ .72 $ 16,263 $ .89
Weight Average Shares Outstanding 18,371,477 18,371,477 18,371,477
</TABLE>
The Trust's total interest income decreased by approximately $2 million for 1999
when compared to 1998 due primarily to decreases in participation income and
basic interest income on PIM and PIMI's. The decrease in participation income
from 1999 as compared to 1998 was a result of the participation income received
when the payoff of the St. Germain PIMI occurred in 1998 exceeding the total
participation income received when the Windsor Lake PIMI prepaid. Basic interest
on the PIMs and PIMIs also decreased due to the St. Germain payoff.
Trust expenses for 1999 decreased by approximately $3.8 million when compared to
1998, due to decreases in the provision for impaired mortgage loan, asset
management fees, and amortization expense. The Trust recorded a provision for
impaired mortgage loans of $2,994,000 related to Windmill and Oasis Additional
Loans in 1998. The decrease in asset management fees resulted from the Trust's
asset base declining. Amortization expense in 1998 decreased because the Trust
fully amortized the remaining prepaid acquisition costs and participating
servicing fees relating to the St. Germain PIMI when it paid off.
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 of participation income received when the repayment of the
Willows Additional Loan occurred, and $981,000 of participation interest on the
other PIMs and PIMIs in 1997. 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, caused a corresponding decrease in the basic interest on PIMs and
PIMIs in 1998 as compared to 1997. The increase in other interest income is due
to 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 increased by approximately $3.4 million in 1998 as compared to
1997 primarily due to the Trust recording a provision for impaired mortgage
loans of $2,994,000 related to Windmill Lakes and Oasis as discussed above.
Expense reimbursements decreased when comparing 1998 to 1997 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.
<PAGE>
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 (53) Chairman of Board of Trustees and Trustee
* Charles N. Goldberg (58) Trustee
* E. Robert Roskind (55) Trustee
* J. Paul Finnegan (75) Trustee
Robert A. Barrows (42) Treasurer
Scott D. Spelfogel (39) Clerk
Kristin L. Hicks (33) 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 acquisitions, property management,
investment sponsorship, venture capital investing, mortgage banking,
financial management, and ownership of three operating companies through
private equity 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 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.
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.
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 and 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, 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 currently serves as a Trustee of Krupp Government Income Trust II
and a director at Scituate Federal Savings Bank. Mr. Finnegan is a
Certified Public Accountant and an attorney.
<PAGE>
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 55) is the Co-Founder and Co-Chairman of The Berkshire
Group, an integrated real estate financial services firm engaged in real
estate acquisitions, property management, investment sponsorship, venture
capital investing, mortgage banking, financial management, and ownership of
three operating companies through private equity 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 September 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 46) 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 $7.2 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 58) is President and Chief Operating Officer 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 50) 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
$7.2 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 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
As of February 5, 2000, 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.
<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, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note G to Financial Statements included in Appendix A of this report.
<PAGE>
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)].*
<PAGE>
The Seasons
(10.7) 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)].*
(10.8) 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)].*
(10.9) 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)].*
(10.10) 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)].*
(10.11) 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)].*
(10.12) 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)].*
(10.13) 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
(10.14) 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)].*
(10.15) 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)].*
(10.16) 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)].*
(10.17) 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
(10.18) 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)].*
<PAGE>
(10.19) 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)].*
(10.20) 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
(10.21) 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)].*
(10.22) 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)].*
(10.23) 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)].*
(10.24) 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)].*
(10.25) 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)].*
(10.26) 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)].*
(10.27) 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
(10.28) 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)].*
(10.29) 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)].*
(10.30) 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)].*
(10.31) 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)].*
<PAGE>
(10.32) 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)].*
(10.33) 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
(10.34) 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)].*
(10.35) 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)].*
(10.36) 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)].*
(10.37) 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)].*
(10.38) 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)].*
(10.39) 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
(10.40) 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)].*
(10.41) 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)].*
(10.42) 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)].*
(10.43) 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)].*
(10.44) 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)].*
<PAGE>
(10.45) 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
(10.46) 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
(10.47) 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)].*
(10.48) 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)].*
(10.49) 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)].*
(10.50) 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
(10.51) 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)].*
(10.52) 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)].*
(10.53) 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)].*
(10.54) 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)].*
(10.55) 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)].*
(10.56) 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)].*
<PAGE>
The Fountains
(10.57) 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)].*
(10.58) 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)].*
(10.59) 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
(10.60) 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)].*
(10.61) 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)].*
(10.62) 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)].*
(10.63) 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)].*
(10.64) 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)].*
(10.65) 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
(10.66) 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)].*
(10.67) 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)].*
(10.68) 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)].*
<PAGE>
Mill Pond II Apartments
(10.69) 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)].*
(10.70) 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)].*
(10.71) 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)].*
(10.72) 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, 1999.
<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
9th day of March, 2000.
KRUPP GOVERNMENT INCOME TRUST II
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 9th day of March, 2000.
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 Trust II
Robert A. Barrows
/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, 1999
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants F-3
Balance Sheets at December 31, 1999 and 1998 F-4
Statements of Income and Comprehensive Income for the Years Ended
December 31, 1999, 1998, and 1997 F-5
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 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 Board of Trustees and Shareholders of
Krupp Government Income Trust II:
In our opinion, the accompanying balance sheets and the related statements
of income and comprehensive income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Krupp Government Income Trust II (the "Trust") at December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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 9, 2000
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
Participating Insured Mortgage Investments
("PIMIs")(Notes B, C and I):
<S> <C> <C>
Insured mortgages $ 131,750,452 $ 133,132,325
Additional loans, net of impairment provision of $2,994,000 21,298,351 23,298,351
Participating Insured Mortgages ("PIMs")
(Notes B, D and I) 37,994,412 38,331,257
Mortgage-Backed Securities ("MBS") and Insured
mortgage loan
(Notes B, E and I) 21,127,474 41,834,199
Total mortgage investments 212,170,689 236,596,132
Cash and cash equivalents (Notes B and I) 8,653,673 18,010,578
Prepaid acquisition fees and expenses, net of
accumulated amortization of $8,093,170 and
$7,167,563 (Note B) 6,522,092 8,289,549
Prepaid participation servicing fees, net of
accumulated amortization of $2,262,659 and
$2,321,513 (Note B) 2,233,060 2,830,857
Interest receivable and other assets 1,629,549 1,682,882
Total assets $ 231,209,063 $ 267,409,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note B) $ 2,692,976 $ 2,719,343
Other liabilities 150,025 43,563
Total liabilities 2,843,001 2,762,906
Shareholders' equity (Notes A and F):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 228,920,012 264,099,856
Accumulated comprehensive (loss)
income (Notes B and E) (553,950) 547,236
Total Shareholders' equity 228,366,062 264,647,092
Total liabilities and Shareholders'
equity $ 231,209,063 $ 267,409,998
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Revenues:
Interest income - PIMs and PIMIs:
<S> <C> <C> <C>
Basic interest $ 11,998,012 $ 12,449,922 $ 13,828,125
Additional Loan interest 1,712,260 1,580,517 2,147,468
Participation income 1,591,932 3,252,020 1,769,701
Interest income - MBS including
prepayment premium 3,251,078 3,264,905 2,847,442
Interest income - other 1,059,900 1,082,305 697,819
Total revenues 19,613,182 21,629,669 21,290,555
Expenses:
Asset management fee to an
affiliate (Note G) 1,718,942 1,889,509 2,002,992
Expense reimbursements to
affiliates (Note G) 276,901 227,556 446,357
Amortization of prepaid fees and expenses 2,365,254 2,900,106 2,186,556
General and administrative 277,747 435,387 391,165
Provision for impaired mortgage
loans (Notes B and C) - 2,994,000 -
Total expenses 4,638,844 8,446,558 5,027,070
Net income (Notes B and H) 14,974,338 13,183,111 16,263,485
Other comprehensive income:
Net change in unrealized (loss)
gain on MBS (1,101,186) 40,493 384,408
Total comprehensive income $13,873,152 $13,223,604 $16,647,893
Basic earnings per share $ .82 $ .72 $ .89
Weighted average shares
outstanding 18,371,477 18,371,477 18,371,477
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
Accumulated Total
Retained Comprehensive Shareholders'
Common Stock Earnings Income Equity
<S> <C> <C> <C> <C>
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
Dividends (35,179,844) (14,974,338) - (50,154,182)
Net income 14,974,338 - 14,974,338
Change in unrealized gain on MBS - - (1,101,186) (1,101,186)
Balance at December 31, 1999 $ 228,920,012 $ - $ (553,950) $ 228,366,062
</TABLE>
Shares issued and outstanding for each of the three years in the period ended
December 31, are 18,371,477
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Operating activities:
<S> <C> <C> <C>
Net income $ 14,974,338 $ 13,183,111 $ 16,263,485
Adjustments to reconcile net income
to net cash provided by operating
activities:
Premium amortization, net 173,055 185,276 113,094
Provision for impaired mortgage loans - 2,994,000 -
Amortization of prepaid fees and expenses 2,365,254 2,900,106 2,186,556
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 53,333 428,271 153,534
(Decrease) increase in deferred income
on Additional Loans (26,367) (36,362) 1,173,651
Increase in other liabilities 106,462 12,614 3,864
Net cash provided by
operating activities 17,646,075 19,667,016 19,894,184
Investing activities:
Investment in PIMs - (1,003,676) -
Investment in Additional Loans - - (465,000)
Prepayment on Additional Loan 2,000,000 2,860,000 1,265,000
Principal collections on MBS 19,432,484 9,192,319 4,775,477
Principal collections on PIMs 1,718,718 12,722,410 1,800,237
Net cash provided by
investing activities 23,151,202 23,771,053 7,375,714
Financing activity:
Dividends (50,154,182) (38,947,582) (22,964,399)
Net decrease increase in cash and
cash equivalents (9,356,905) 4,490,487 4,305,499
Cash and cash equivalents, beginning
of period 18,010,578 13,520,091 9,214,592
Cash and cash equivalents, end of
period $ 8,653,673 $ 18,010,578 $ 13,520,091
Supplemental disclosure of noncash investing activities:
Reclassification of investments in a
PIM and PIMI to an MBS $ - $ - $ 15,093,814
Non cash activities:
(Decrease) increase in Fair Value of MBS $ (1,101,186) $ 40,493 $ 384,408
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<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
"Advisor") 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, in accordance with the Financial Accounting Standards Board's
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities (FAS 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). FAS
130 established 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.
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.
The insured mortgage portion of the Federal Housing Administration (FHA)
PIM or PIMI is carried at amortized cost. The Trust holds these mortgages
at amortized cost since they are fully insured by FHA.
The Additional Loans are carried at amortized cost unless the Advisor
believes there is an impairment in value, in which case a valuation
allowance is established.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
B. Significant Accounting Policies, Continued
PIMs and PIMIs, continued
Basic interest is recognized based on the stated rate of the Department of
Housing and Urban Development (HUD) Insured Mortgage loan (less the
servicer's fee) or the coupon rate of the Government National Mortgage
Association (GNMA) or Fannie Mae MBS. The Trust recognizes interest related
to the participation features when these amounts are collectible and
estimable. 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 to make the required
Additional Loan interest payments with operating funds, the Trust
recognizes income as earned and commences amortizing deferred interest
amounts into income over the remaining estimated term of the Additional
Loan. During periods where mortgage loans are impaired the Trust suspends
amortizing deferred interest.
The Trust also fully reserves the portion of any Additional Loan interest
payment satisfied through the issuance of an operating loss and any
associated interest due on such operating loan. The Trust will recognize
the income related to the operating loan when the borrower repays amounts
due under the operating loan.
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 Agency paper, commercial paper and
money market funds with a commercial bank and has not experienced any loss
to date on its invested cash.
Prepaid Fees and Expenses
Prepaid fees and expenses 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. 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.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
B. Significant Accounting Policies, Continued
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, 1999 and at December
31, 1998 that provide financing 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 ("Participating Income Interest"), a percentage of any
appreciation of the underlying property to a preferred return, and a
percentage of any appreciation thereafter ("Participating 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. The owners of
the borrower also pledge their ownership interests in the borrower as
additional collateral.
The Trust made the Additional Loans on 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 level monthly payments of principal and interest
payments, amortizing over thirty to forty years 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.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
C. PIMIs, Continued
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.
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.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
C. PIMIs, Continued
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.
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 tenth 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 December 16, 1999, the Trust received $2,832,907 from Windsor Lake
consisting of $2,000,000 from the payoff of the Additional Loan, $40,000 of
base interest on the Additional Loan and $792,907 of participating
appreciation interest income. The payoff of the balance on the insured
mortgage, $9,172,642 was received on January 26, 2000. The Trust paid a
special dividend of $.66 per Share from the prepayment proceeds on February
18, 2000.
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.
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
At December 31, 1999 and 1998 there are no insured mortgage loans within the
Trust's portfolio that are delinquent as to principal or interest.
The Trust's investments in PIMIs consists of the following at
December 31, 1999 and 1998:
Insured Loan Monthly Interest Maturity Balance Outstanding at December 31,
Mortgages Amount Payments Rate Date 1999 1998
FHA
<S> <C> <C> <C> <C> <C> <C>
The Seasons (a) $ 23,224,649 $ 162,635 7.875% 10/01/28 $ 22,260,149 $ 22,450,457
Hunters Pointe (g) 12,789,100 78,178 6.875% 01/01/35 12,447,138 12,526,503
Norumbega Point 15,598,500 101,053 7.375% 02/01/36 15,317,692 15,397,380
FNMA (b)
Crossings Village 12,907,334 82,164 6.75% 10/01/08 12,090,416 12,253,314
Martin's Landing 11,200,000 69,310 6.50% 12/01/08 10,478,301 10,622,947
Sunset Summit 10,192,801 63,122 6.50% 10/01/08 9,542,738 9,674,470
Oasis 12,401,673 78,796 6.75% 07/01/09 11,760,701 11,906,186
Windsor Lake 9,680,344 61,610 6.75% 07/01/09 9,172,642 9,287,879
Windmill Lakes 11,600,000 74,274 6.825% 03/01/10 11,062,433 11,193,107
The Lakes 18,387,653 117,745 6.825% 07/01/10 17,618,242 17,820,082
$ 137,982,054 $ 888,887 $ 131,750,452 $ 133,132,325
(f)
</TABLE>
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
__________________
Base Preferred
Maturity Interest Interest
Additional Loans 1999 1998 Date Rate Rate
<S> <C> <C> <C> <C> <C>
The Seasons (a) $ 4,925,351 $ 4,925,351 10/01/28 9%(c) 10%
Hunters Pointe (g) 650,000 650,000 01/01/35 7% 9%
Norumbega Pointe 3,063,000 3,063,000 07/02/06 7% 10%
Crossings Village 2,584,000 2,584,000 10/01/08 7% 9%
Martin's Landing 2,280,000 2,280,000 12/01/08 7% 12%
Sunset Summit 1,900,000 1,900,000 12/01/08 7% 9%(d)
Oasis (h) 2,290,000 2,290,000 09/01/09 7% 9.25%
Windsor Lake - 2,000,000 - 8% 13%
Windmill Lakes (e) 2,000,000 2,000,000 03/01/10 7.5% 9.5%
The Lakes 4,600,000 4,600,000 07/01/10 7% 9%
$ 24,292,351 $ 26,292,351
</TABLE>
<TABLE>
<CAPTION>
(a) The total PIMI 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:
<S> <C>
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
</TABLE>
(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 has agreed to defer the
delinquent Additional Loan Interest payments pending a sale of the
property. If it becomes apparent that a sale mutually acceptable to
both the Trust and the borrower will not be possible, the Advisor will
re-assess the feasibility of extending long term debt service relief.
(f) The aggregate cost for federal income tax purposes is $131,750,452.
(g) As of November 12, 1999 Falls at Hunters Point was in default for not
making the participation income payment due the Trust based on 1997
and 1998 operations. The Advisor is pursuing remedies to cure the
default.
(h) The modification agreement for the debt service relief is currently
being negotiated between the Advisor and the borrower.
Continued
<PAGE>
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
$2,000,000 was 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 1999 or 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 was
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 1999
or 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, 1999 $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 quarter 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 1999, 1998 and 1997 are as follows:
Insured Mortgages
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of period $ 133,132,325 $145,537,234 $150,454,030
Reclassification - - (3,515,288)
Principal collections (1,381,873) (12,404,909) (1,401,508)
Balance at end of period $ 131,750,452 $ 133,132,325 $145,537,234
</TABLE>
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
C. PIMIs, Continued
Additional Loans
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of period $ 23,298,351 $ 29,152,351 $ 29,952,351
Additional loan prepayments (2,000,000) (2,860,000) (1,265,000)
Additional loan investments - - 465,000
Valuation allowance - (2,994,000) -
Balance at end of period $ 21,298,351 $ 23,298,351 $ 29,152,351
</TABLE>
Property Descriptions:
o The Seasons is a 1,088-unit apartment complex located in Laurel,
Maryland.
o 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.
o Norumbega Point is a 93-unit assisted living facility in Weston,
Massachusetts.
o Crossings Village Apartments ("Crossings Village") is a 286-unit
apartment complex located in Westlake, Ohio.
o Martin's Landing Apartments ("Martin's Landing") is a 300-unit
apartment complex in Roswell, Georgia.
o Sunset Summit Apartments ("Sunset Summit") is a 261-unit apartment
complex located in Portland, Oregon.
o Oasis at Springtree ("Oasis") is a 276-unit apartment complex located
in Sunrise, Florida.
o Windsor Lake Apartments ("Windsor Lake") is a 416-unit apartment
complex in Smyrna, Georgia.
o Windmill Lakes Apartments ("Windmill Lakes") is a 264-unit garden
style apartment complex in Pembroke Pines, Broward County, Florida.
o 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 level monthly principal and interest payments, amortizing
over thirty to forty years 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.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
D. PIMs, Continued
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
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.
At December 31, 1999 and 1998 there are no insured mortgage loans within
the Trust's portfolio that are delinquent of principal or interest.
During the second quarter of 1998, the Trust completed the funding of its
commitment on the Fountains PIM.
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.
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
The Trust's PIMs consisted of the following at December 31, 1999 and 1998:
Original Monthly Interest Maturity
PIM Amount Payments Rate Date Balance Outstanding at December 31,
1999 1998
FNMA
<S> <C> <C> <C> <C> <C> <C>
Mequon Trails $ 14,937,726 $ 93,123 6.50% 01/01/08 $ 13,756,994 $ 13,971,630
(a)
FHA
Rivergreens II 6,137,199 39,763 7.375% 01/01/35 5,992,928 6,026,715
Mill Ponds II 8,245,300 51,900 7.125% 12/01/35 8,082,848 8,127,964
The Fountains 10,336,000 70,803 7.50% 11/01/36 10,161,642 10,204,948
(b)
Total $ 39,656,225 $ 255,589 $ 37,994,412 $ 38,331,257
(c)
</TABLE>
(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 $37,994,412.
<TABLE>
<CAPTION>
Reconciliations of activity for 1999, 1998 and 1997 are as follows:
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of period $ 38,331,257 $ 37,645,082 $49,622,337
Acquisitions - 1,003,676 -
Reclassification - - (11,578,526)
Discount amortization 217 - -
Principal collections (337,062) (317,501) (398,729)
Balance at end of period $ 37,994,412 $ 38,331,257 $37,645,082
</TABLE>
Property descriptions:
- 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.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
E. Mortgage Backed Securities
The Trust received a payoff from The Estates MBS consisting of a first
mortgage of $11,375,380 on October 18, 1999. In addition, the Trust
received a prepayment premium of $1,023,784. The Trust paid a special
dividend of $.68 per Unit from the proceeds on October 27, 1999.
At December 31, 1999, the Trust's MBS portfolio has an amortized cost of
$21,681,424 and gross unrealized gains and losses of approximately $29,115
and $583,065 , respectively. At December 31, 1998, the Trust's MBS
portfolio had an amortized cost of $29,821,474 and gross unrealized gains
and losses of approximately $556,799 and $9,563, respectively. At December
31, 1998, the Trust's insured mortgage had an amortized cost of
$11,465,489. The MBS have maturities ranging from 2009 to 2031.
<TABLE>
<CAPTION>
Maturity Date Fair Value Unrealized Loss
<S> <C> <C>
2001 - 2005 $ - $ -
2005 - 2010 3,600,705 (93,988)
2010 - 2031 17,526,769 (459,962)
Total $ 21,127,474 $(553,950)
</TABLE>
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. 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, $443,282, and $1,024,097 of base
interest from The Seasons in 1999, 1998 and 1997, respectively (see Note
C). In addition, the Trust received $392,816 in 1999, $239,107 in 1998 and
$83,360 in 1997 related to participating interest income.
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
H. Federal Income Taxes
The reconciliation of the income reported in the accompanying statement of income with the income reported in the Trust's
1999 federal income tax return follows:
<S> <C>
Net income per statement of income $ 14,974,338
Add:
Book to tax difference for amortization
of prepaid fees and expenses 478,748
Less: Book to tax difference for Additional Loan interest income 633,287
Net income for federal income tax purposes $ 16,086,373
</TABLE>
The Trust paid dividends of $2.73 per share during 1999 which represents
approximately $.88 from ordinary income and $1.85 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 $10,156,000, and $8,347,000 at December
31, 1999 and 1998, respectively. The basis of the Trust's liabilities for
financial reporting purposes exceeded its tax basis by approximately
$2,693,000 and $2,289,000 at December 31, 1999 and 1998, respectively.
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.
Based on the estimated fair value determined using these methods and
assumptions, the Trust's investments in MBS has gross unrealized gains and
losses of approximately $29,000 and $583,000 at December 31, 1999 and
$557,000 and $10,000 at December 31, 1998.
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 and losses of approximately $71,000 and $5,944,000, respectively at
December 31, 1999 and gross unrealized gains and losses of approximately
$4,181,000 and $1,309,000 at December 31, 1998.
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
I. Fair Value Disclosures of Financial Instruments, continued
At December 31, 1999 and 1998, the estimated fair values of the Trust's
financial instruments are as follows:
(rounded to thousands)
1999 1998
Fair Carrying Fair Carrying
Value Value Value Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,654 $ 8,654 $ 18,011 $ 18,011
MBS 21,127 21,127 41,834 41,834
PIMs and PIMIs:
PIMs 36,763 37,994 39,056 38,331
Insured mortgages 127,108 131,750 135,279 133,132
Additional loans 21,298 21,298 23,298 23,298
$ 214,950 $ 220,823 $ 257,478 $ 254,606
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
Allowance $ 2,994,000 $ - $ - $ 2,994,000
</TABLE>
<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,
1999 1999 1999 1999
<S> <C> <C> <C> <C>
Total revenues $ 4,410,220 $ 4,552,556 $ 4,484,788 $ 6,165,618
Net income $ 3,381,041 $ 3,400,890 $ 3,397,863 $ 4,794,544
Earnings per Share $ .18 $ .19 $ .18 $ .27
For the Quarter Ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
(Amounts in thousands, except per Share amounts)
Year Inception
Ended Through
12/31/99 12/31/99
Distributable Cash Flow (a):
<S> <C> <C>
Net income $ 14,974 $ 111,825
Items not requiring the use
of operating funds:
Provision for impaired mortgage loans - 2,994
Loss on sale of MBS - 1,379
Amortization of prepaid fees and
expenses and organization costs 2,365 13,273
Additional Loan interest received
and deferred, net (27) 2,693
Total Distributable Cash Flow ("DCF") $ 17,312 $ 132,164
DCF per Share based on Shares
outstanding at December, 31 1999 $ .94 $ 7.19(d)
Dividends:
Total dividends to Shareholders $ 48,823(b) $ 229,120(c)
Average dividend per Share based
on Shares outstanding at
December 31, 1999 $ 2.66(b) $ 12.47(c)(d)
</TABLE>
(a) Distributable Cash Flow consists of income before provision for
impaired mortgage loans, amortization of prepaid fees and expenses and
organization costs and includes interest collections on Additional
Loans which have not been recognized as income for book purposes. The
Trust believes Distributable Cash Flow is an appropriate supplemental
measure of operating performance, however, it should not be considered
as a substitute for net income as an indication of operating
performance or cash flows as a measure of liquidity.
(b) Represents all dividends paid in 1999 except the February 1999
dividend and includes an estimate of the dividend to be paid in
February 2000.
(c) Includes an estimate of the distribution to be paid in February 2000.
(d) Shareholders average per Share return of capital on a cash basis as of
February 2000 is $5.28 [$12.47- $7.19]. Return of capital represents
that portion of dividends which is not funded from DCF, such as
proceeds from the sale of assets and substantially all of the
principal collections received from MBS, PIMs and PIMIs.
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,653,673
<SECURITIES> 212,170,689<F1>
<RECEIVABLES> 1,629,549
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,755,152<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 231,209,063
<CURRENT-LIABILITIES> 2,843,001<F3>
<BONDS> 0
0
0
<COMMON> 228,920,012
<OTHER-SE> (553,950)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 231,209,063
<SALES> 0
<TOTAL-REVENUES> 19,613,182<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,638,844<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,974,338
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,974,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,974,338
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $131,750,452 and Additional Loans of $21,298,351),
Participating Insured Mortgages ("PIMs") of $37,994,412 and Mortgage-backed
Securities ("MBS") of $21,127,474.
<F2> Includes prepaid acquisition fees and expenses of $14,615,262 net of
accumulated amortization of $8,093,170 and prepaid participation servicing
fees of $4,495,719 net of accumulated amortization of $2,262,659.
<F3> Includes deferred income on Additional Loans of $2,692,976.
<F4> Unrealized loss on MBS.
<F5> Represents interest income on investments in mortgages and cash.
<F6> Includes $2,365,254 of amortization of prepaid fees and expenses.
</FN>
</TABLE>
