UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19244
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Krupp Government Income Trust
Massachusetts 04-3089272
(State or other jurisdiction of incorporation or organization) (IRS employer identification no.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ------
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
prepayments of mortgages; failure of borrowers to pay participation interests
due to poor operating results of properties underlying the mortgages; uninsured
losses and potential conflicts of interest between the Trust and its Affiliates,
including the Trustees. The Company's filings with the Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 2001, contain additional information concerning such risk factors. Actual
results in the future could differ materially from those described in any
forward-looking statements as a result of the risk factors set forth above, and
the risk factors described in the Annual Report."
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
-------------- ---------------
Participating Insured Mortgage Investments
("PIMIs") (Note 2)
Insured Mortgages $ 32,370,341 $ 50,811,558
Additional Loans, net of impairment provision of $1,698,811 3,871,180 3,871,180
Participating Insured Mortgages ("PIMs")(Note 2) 30,689,220 46,416,493
Mortgage-Backed Securities and insured mortgage loan ("MBS") (Note 3) 11,729,120 14,971,348
-------------- ---------------
Total mortgage investments 78,659,861 116,070,579
Cash and cash equivalents 5,690,643 13,154,231
Interest receivable and other assets 499,770 756,832
Prepaid acquisition fees and expenses, net
of accumulated amortization of $3,198,380
and $6,249,229, respectively 176,581 541,044
Prepaid participation servicing fees, net of
accumulated amortization of $1,021,992 and
$1,999,913, respectively 102,968 263,455
-------------- ---------------
Total assets $ 85,129,823 $ 130,786,141
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans $ 2,175,972 $ 2,336,154
Other liabilities 117,278 20,485
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Total liabilities 2,293,250 2,356,639
-------------- ---------------
Shareholders' equity (Note 4)
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares issued and outstanding 82,440,175 127,850,874
Accumulated comprehensive income 396,398 578,628
-------------- ----------------
Total Shareholders' equity 82,836,573 128,429,502
-------------- ---------------
Total liabilities and Shareholders' equity $ 85,129,823 $ 130,786,141
============== ===============
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
------------ ------------- ------------ ------------
Revenues:
Interest income - PIMs and PIMIs:
Basic interest $ 1,248,030 $ 2,044,820 $ 2,620,518 $ 4,119,434
Additional Loan interest (Note 5) 80,091 185,938 160,182 371,877
Participation interest (Note 5) 1,092,626 118,968 1,964,251 251,850
Interest income - MBS 451,728 317,954 743,714 643,543
Interest income - cash and
cash equivalents 34,949 63,458 90,569 140,179
------------ ------------ ------------ ------------
Total revenues 2,907,424 2,731,138 5,579,234 5,526,883
------------ ------------ ------------ ------------
Expenses:
Asset management fee to an affiliate 157,141 247,593 327,625 493,669
Expense reimbursements to affiliates 55,377 65,531 92,188 112,040
Amortization of prepaid
fees and expenses 248,967 257,434 524,950 514,868
General and administrative 117,574 115,393 219,293 220,740
------------ ------------ ------------ ------------
Total expenses 579,059 685,951 1,164,056 1,341,317
------------ ------------ ------------ ------------
Net income 2,328,365 2,045,187 4,415,178 4,185,566
Other comprehensive income:
Net change in unrealized gain
on MBS (199,669) 18,847 (182,230) 70,725
------------ ------------ ------------ ------------
Total comprehensive income $ 2,128,696 $ 2,064,034 $ 4,232,948 $ 4,256,291
============ ============ ============ ============
Basic earnings per Share $ .15 $ .14 $ .29 $ .28
============ ============ ============ ============
Weighted average Shares outstanding 15,053,135 15,053,135
========== ==========
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
----------------------------------
2002 2001
-------------- --------------
Operating activities:
Net income $ 4,415,178 $ 4,185,566
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of (discounts) and premiums (150,057) 1,082
Amortization of prepaid fees and expenses 524,950 514,868
Changes in assets and liabilities:
Decrease in interest receivable and other assets 257,062 137,624
Decrease in deferred income on Additional Loans (160,182) (183,768)
Increase in other liabilities 96,793 24,307
-------------- --------------
Net cash provided by operating activities 4,983,744 4,679,679
-------------- --------------
Investing activities:
Principal collections on MBS 3,210,055 805,417
Principal collections on PIMs and Insured Mortgages 34,168,490 433,843
-------------- --------------
Net cash provided by investing activities 37,378,545 1,239,260
-------------- --------------
Financing activity:
Dividends (49,825,877) (5,118,066)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (7,463,588) 800,873
Cash and cash equivalents, beginning of period 13,154,231 5,359,041
-------------- --------------
Cash and cash equivalents, end of period $ 5,690,643 $ 6,159,914
============== ==============
Non Cash Activities:
Increase (decrease) in Fair Value of MBS $ (182,230) $ 70,725
============== ==============
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted in this report on Form 10-Q pursuant to the Rules and
Regulations of the Securities and Exchange Commission. However, in the
opinion of Berkshire Mortgage Advisors Limited Partnership (the
"Advisor"), which is the advisor to Krupp Government Income Trust (the
"Trust"), the disclosures contained in this report are adequate to
make the information presented not misleading. See Notes to Financial
Statements in the Trust's Form 10-K for the year ended December 31,
2001 for additional information relevant to significant accounting
policies followed by the Trust.
In the opinion of the Advisor of the Trust, the accompanying unaudited
financial statements reflect all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the Trust's
financial position as of June 30, 2002, results of its operations for
the three and six months ended June 30, 2002 and 2001 and its cash
flows for the six months ended June 30, 2002 and 2001.
The results of operations for the three and six months ended June 30,
2002 are not necessarily indicative of the results which may be
expected for the full year. See Management's Discussion and Analysis
of Financial Condition and Results of Operations included in this
report.
2. PIMs and PIMIs
At June 30, 2002, the Trust's PIMs and PIMIs, including Additional
Loans, had a fair value of $69,301,795 and gross unrealized gains of
$2,371,054. The PIMs and PIMIs have maturities ranging from 2002 to
2034. At June 30, 2002, there are no insured mortgage loans within the
Trust's portfolio that are delinquent of principal or interest.
Lifestyle and Mountain View have been adversely affected by their
competitive rental housing markets. Based on the Advisor's analysis of
market conditions and property operations, the Trust maintains a
valuation allowance of $1,032,272 for Mountain View and $666,539 for
Lifestyles.
On June 28, 2002, the Trust received a prepayment of the Lincoln Green
Apartments Subordinated Promissory Note. The Trust received $725,000
of Shared Appreciation Interest and $278,785 of Shared Income Interest
and Minimum Additional Interest. On July 25, 2002, the Trust received
$13,676,641 representing the principal proceeds on the first mortgage
note. The Advisor expects to pay a special dividend of $0.99 per share
from the proceeds of the Lincoln Green Apartments PIM prepayment.
On May 15, 2002, the Trust received $8,884,123 representing the
principal proceeds on the first mortgage loan from the River View
Apartments PIM. In addition, the Trust received a prepayment premium
of $88,841 from the payoff. On June 4, 2002, the Trust paid a special
dividend of $0.61 per share from the proceeds of the River View
Apartments PIM prepayment.
On January 3, 2002, the Trust received $18,330,825 representing the
principal proceeds on the first mortgage loan from the Red Run PIMI.
On December 31, 2001 the Trust received a prepayment of the Red Run
Additional Loan and Subordinated Promissory Note. The Trust received
$2,900,000 of Additional Loan Principal, $238,369 of Shared
Appreciation Interest, $3,506,952 of Preferred Interest and $67,667 of
Base Interest on the Additional Loan. On January 16, 2002, the Trust
paid a special dividend of $1.68 per share from the proceeds of the
Red Run PIMI prepayment.
On January 2, 2002, the Trust received a prepayment of the Waterford
Apartments Subordinate Promissory Note. The Trust received $379,725 of
Minimum Additional Interest and $425,643 of Shared Appreciation
Interest. On January 17, 2002, the Trust received $6,625,742
representing the principal proceeds on the first mortgage loan. In
addition, the Trust received a prepayment premium of $66,257 from the
payoff. On March 1, 2002, the Trust paid a special dividend of $0.51
per share from the proceeds of the Waterford Apartments PIM
prepayment.
Continued
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At June 30, 2002, the Trust's MBS portfolio had an amortized cost of
$6,498,286 and unrealized gains of $396,398. At June 30, 2002, the Trust's
insured mortgage loan had an amortized cost of $4,834,436. The portfolio
has maturities ranging from 2008 to 2035.
On May 15, 2002, the Trust received $2,487,447 representing the principal
proceeds on the first mortgage loan from the Parkwest Apartments MBS. In
addition, the Trust received a prepayment premium of $49,749 from this
payoff. On June 19, 2002, the Trust paid a special dividend of $0.17 per
share from the proceeds of the Parkwest Apartments MBS prepayment.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for six months ended
June 30, 2002 is as follows:
Total Accumulated
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
-------------- -------------- ------------ ---------------
Balance at December 31, 2001 $ 127,850,874 $ - $ 578,628 $ 128,429,502
Net income - 4,415,178 - 4,415,178
Dividends (45,410,699) (4,415,178) - (49,825,877)
Change in unrealized
gain on MBS - - (182,230) (182,230)
-------------- -------------- ------------ ---------------
Balance at June 30, 2002 $ 82,440,175 $ - $ 396,398 $ 82,836,573
============== ============== ============ ===============
5. Related Party Transactions
The Trust received $86,609 of Additional Loan Interest during the six
months ended June 30, 2001 from an affiliate of the Advisor. The Trust also
received participation interest of $50,750 from an affiliate of the Advisor
during the six months ended June 30, 2001.
6. Subsequent Event
On July 1, 2002, the Trust granted a sixty day extension of the maturity
date of the Windward Lakes Additional Loan Agreement and Additional Loan
Note. The new maturity date is September 5, 2002.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this
report on Form 10-Q constitute "forward-looking statements" within the
meaning of the Federal Private Securities Litigation Reform Act of
1995. These forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the Trust's
actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors include,
among other things, federal, state or local regulations; adverse
changes in general economic or local conditions; the inability of the
borrower to meet financial obligations on additional loans;
pre-payments of mortgages; failure of borrowers to pay participation
interests due to poor operating results at properties underlying the
mortgages; uninsured losses and potential conflicts of interest
between the Trust and its Affiliates, including the Advisor.
Liquidity and Capital Resources
At June 30, 2002, the Trust had liquidity consisting of cash and cash
equivalents of approximately $5.7 million as well as the cash inflows
provided by PIMs, PIMIs, MBS and 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 demands on the Trust's liquidity are quarterly
dividends paid to investors of approximately $2.6 million and special
dividends. Funds for dividends come from interest income received on
PIMs, PIMIs, MBS and cash and cash equivalents net of operating
expenses, and the principal collections received on PIMs, PIMIs and
MBS. The portion of dividends funded from principal collections
reduces the capital resources of the Trust. As the capital resources
of the Trust decrease, the total cash flows to the Trust will also
decrease which may result in periodic adjustments to the dividends
paid to the investors.
The Advisor periodically reviews the dividend rate to determine
whether an adjustment is necessary based on projected future cash
flows. The current dividend rate is $.17 per Share per quarter. The
Trustees, based on the Advisor's recommendations, generally set a
dividend rate that provides for level quarterly dividends. To the
extent quarterly dividends do not fully utilize the cash available for
distribution and cash balances increase, the Trustees may adjust the
dividend rate or distribute such funds through a special dividend.
In addition to providing guaranteed or insured monthly principal and
interest payments, the Trust's investments in PIMs and PIMIs also may
provide additional income through the interest on the Additional Loan
portion of the PIMIs as well as participation interest based on
operating cash flow and an increase in the value realized upon the
sale or refinance of the underlying properties. However, these
payments are neither guaranteed nor insured and depend upon the
successful operations of the underlying properties.
On June 28, 2002, the Trust received a prepayment of the Lincoln Green
Apartments Subordinated Promissory Note. The Trust received $725,000
of Shared Appreciation Interest and $278,785 of Shared Income Interest
and Minimum Additional Interest. On July 25, 2002, the Trust received
$13,676,641 representing the principal proceeds on the first mortgage
loan from the Lincoln Green Apartments PIM. The Advisor expects to pay
a special dividend of $.99 per share during the third quarter from the
proceeds of the Lincoln Green Apartments PIM prepayment.
On May 15, 2002, the Trust received $8,884,123 representing the
principal proceeds on the first mortgage loan from the River View
Apartments PIM. In addition, the Trust received a prepayment premium
of $88,841 from the payoff. On June 4, 2002, the Trust paid a special
dividend of $0.61 per share from the proceeds of the River View
Apartments PIM prepayment.
Also on May 15, 2002, the Trust received $2,487,447 representing the
principal proceeds on the first mortgage loan from the Parkwest
Apartments MBS. In addition, the Trust received a prepayment premium
of $49,749 from this payoff. On June 19, 2002, the Trust paid a
special dividend of $0.17 per share from the proceeds of the Parkwest
Apartments MBS prepayment.
On January 3, 2002, the Trust received $18,330,825 representing the
principal proceeds on the first mortgage loan from the Red Run PIMI.
On December 31, 2001, the Trust received a prepayment of the Red Run
Additional Loan and Subordinated Promissory Note. The Trust received
$2,900,000 of Additional Loan Principal, $238,369 of Shared
Appreciation Interest, $3,506,952 of Preferred Interest and $67,667 of
Base Interest on the Additional Loan. On January 16, 2002, the Trust
paid a special dividend of $1.68 per share from the proceeds of the
Red Run PIMI prepayment.
On January 2, 2002, the Trust received a prepayment of the Waterford
Apartments Subordinate Promissory Note. The Trust received $379,725 of
Minimum Additional Interest and $425,643 of Shared Appreciation
Interest. On January 17, 2002, the Trust received $6,625,742
representing the principal proceeds on the first mortgage loan. In
addition, the Trust received a prepayment premium of $66,257 from the
payoff. On March 1, 2002, the Trust paid a special dividend of $0.51
per share from the proceeds of the Waterford Apartments PIM
prepayment.
The three remaining PIMI investments all operate under workout
agreements with the Trust. Those agreements have modified the
borrowers' obligations to make Additional Loan interest payments,
regardless of whether the property generated sufficient revenues to do
so, to an obligation to pay Additional Loan interest only if the
property generates Surplus Cash, as defined by HUD. For the period
ending December 31, 2001, Mountain View did not generate any Surplus
Cash, although both Windward Lakes and Lifestyles did generate some
Surplus Cash. However, due to the need to complete capital projects at
both properties, the Trust agreed that the Surplus Cash generated by
the two properties will not be used to pay Additional Loan interest.
Consequently, the Trust does not expect to receive any Additional Loan
interest during 2002. Beginning in 2002, the Trust has amortized and
recognized Additional Loan income previously deferred with respect to
Windward Lakes as the property generated Surplus Cash during 2001.
Windward Lakes' operating results deteriorated during 1995 and 1996,
and in early 1997 the independent Trustees approved a workout with the
borrower of the Windward Lakes PIMI, an affiliate of the Advisor of
the Trust. In the workout, the Trust agreed to reduce the effective
basic interest rate on the insured first mortgage by 2% per annum for
1997 and 1% per annum for 1998, 1999 and 2000. The borrower made an
equity contribution of $133,036 to the property and agreed to cap the
annual management fee paid to an affiliate at 3% of revenues. The
Trust's participation in current operations is 50% of any Surplus Cash
as determined under HUD guidelines, and the Additional Loan interest
is payable out of its share of Surplus Cash. Any unpaid Additional
Loan interest accrues at 7.5% per annum. When the property is sold or
refinanced, the Trust will receive 50% of any net proceeds remaining
after repayment of the insured mortgage, the Additional Loan, the
interest rate relief, accrued and unpaid Additional Loan interest and
the Borrower's equity up to the point that the Trust has received a
cumulative, non-compounded 10% preferred return on its investment in
the PIMI. The Additional Loan was scheduled to mature in July of 2002.
However, the Advisor granted a sixty day extension to the Borrower to
allow the Borrower additional time to finalize a more comprehensive
proposal regarding a longer term extension of the maturity date.
In May 1998, the borrower on the Lifestyles PIMI defaulted on its debt
service payment on the insured first mortgage. The Trust agreed to a
new workout that runs through 2007. Under its terms, the Trust agreed
to reduce the effective interest rate on the insured first mortgage by
1.75% retroactively for 1998 to clear the default, by 1.75% for 1999,
and by 1.5% each year thereafter until 2007. An affiliate of the
Advisor refunds approximately .25% per annum to the Trust related to
the interest reduction. The borrower made a $550,000 equity
contribution, which was escrowed, for the exclusive purpose of
correcting deferred maintenance and making capital improvements to the
property. The escrow has been used up for paint, building repairs,
parking lot repairs, a new fitness facility, clubhouse remodeling and
landscaping. Any Surplus Cash that is generated by property operations
will be split evenly between the Trust and the borrower. When the
property is sold or refinanced, the first $1,100,000 of any proceeds
remaining after the insured mortgage is paid off will be split 50% /
50% between the Trust and the borrower; the next $1,690,220 of
proceeds will be split 75% to the Trust and 25% to the borrower; and
any remaining proceeds will be split 50% / 50%. The borrower's new
equity and the reduction in the effective interest rate on the insured
first mortgage have provided funds for repairs and improvements that
have helped reposition Lifestyles. As a result of the performance of
the property, the Trust had initially established a valuation
allowance of $1,130,346 on the Additional Loan in 1998. During 2001,
the Trust received a payment of $118,968 which was recorded as a
reduction in the principal balance of the Additional Loan and related
impairment provision. Based on improved market conditions and property
operations, the Trust has further reduced the impairment provision by
$344,839 to $666,539 in the fourth quarter of 2001.
Mountain View is similar to Lifestyles with respect to competitive
market conditions. In June 1999, the Trust approved a second workout
that runs through 2004. Under its terms, the Trust agreed to reduce
the effective interest rate on the insured first mortgage by 1.25%
retroactively for 1999 and each year thereafter until 2004, and to
change the participation terms. The workout eliminated the preferred
return feature, forgave $288,580 of previous accruals of Additional
Loan interest related to the first workout, and changed the Trust's
participation in Surplus Cash generated by the property. The Trust
will receive 75% of the first $130,667 of Surplus Cash and 50% of any
remaining Surplus Cash on an annual basis to pay Additional Loan
interest. Unpaid Additional Loan interest related to the second
workout will accrue and be payable if there are sufficient proceeds
from a sale or refinancing of the property. In addition, the borrower
repaid $153,600 of the Additional Loan and funded approximately
$54,000 to a reserve for property improvements. As a result of the
factors described above, the Advisor determined that the Additional
Loan collateralized by the Mountain View asset was impaired and
currently maintains a valuation allowance of $1,032,272.
Whether the operating performance at 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 Loan
collateral.
There are contractual restrictions on the repayment of the PIMs and
PIMIs. During the first five years of the investment, borrowers are
prohibited from repayment. During the second five years, the PIM
borrowers can prepay the insured first mortgage by paying the greater
of a prepayment premium or the participation 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 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 would probably 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.
Critical Accounting Policies
The Trust's critical accounting policies relate primarily to revenue
recognition related to the participation features of the Trust's PIM
and PIMI investments as well as the recognition of deferred interest
income on the Additional Loans. The Trust's policies are as follows:
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 the
amount becomes fixed and the transaction that gives rise to such
amount is consummated. The Trust defers the recognition of Additional
Loan interest payments as income to the extent these interest payments
were from escrows established with the proceeds of the Additional
Loan. When the properties underlying the PIMI's generate sufficient
cash flow to make the required Additional Loan interest payments and
the Additional Loan value is deemed collectible, the Trust recognizes
income as earned and commences amortization of the 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.
Results of Operations
Net income of the Trust increased for the three and six months ended
June 30, 2002 as compared to the same periods in 2001 due to increases
in participation income and interest income on MBS and a decrease in
asset management fees. This is partially offset by decreases in
interest income on PIM's and PIMI's, additional loan interest and
other interest income. Participation income increased due to the
collection of participation income from the Riverview Apartments and
Lincoln Green Apartments PIM's during the second quarter of 2002.
Interest income on MBS increased due to the accelerated recognition of
the Parkwest Apartments MBS purchase discount as income upon the
prepayment of the MBS and the receipt of the prepayment premium.
Interest income on PIM's and PIMI's decreased due to the prepayments
of the Red Run and River View Apartments PIMI's, and the Waterford
Townhomes PIM in 2002 and the Season's PIMI in July of 2001.
Additional loan interest decreased due to the Red Run and Season's
PIMI payoffs in January 2002 and July of 2001, respectively. Other
interest income decreased due to lower average interest rates earned
on cash balances available for short-term investing when compared to
the same period in 2001. Asset management fees decreased due to the
decline in the Trust's asset base as a result of principal collections
and prepayments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
Assessment of Credit Risk
The Trust's investments in insured mortgages and MBS are guaranteed or
insured by Fannie Mae, Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA") and
the Department of Housing and Urban Development (" HUD") and therefore
the certainty of their cash flows and the risk of material loss of the
amounts invested depends on the creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that
guarantees obligations originated under its programs. 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. GNMA guarantees the full and timely
payment of principal and basic interest on the securities it issues,
which represents interest in pooled mortgages insured by HUD.
Obligations insured by HUD, an agency of the U.S. Government, are
backed by the full faith and credit of the U.S. Government.
The Trust's Additional Loans have similar risks as those associated
with higher risk debt instruments, including: reliance on the owner's
operating skills, ability to maintain occupancy levels, control
operating expenses, ability to maintain the properties and obtain
adequate insurance coverage. Operations also may be effected by
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 $4.4
million of Agency paper, which is issued by Government Sponsored
Enterprises with a credit rating equal to the top rating category of a
nationally recognized statistical rating organization.
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 June 30, 2002, the Trust's PIMs, PIMIs and MBS
comprise the majority of the Trust's assets. 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 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.
KRUPP GOVERNMENT INCOME TRUST
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Extension of and Second Modification to the Additional Loan
Agreement and Additional Loan Note, dated July 1, 2002,
between George Krupp, an individual, Douglas Krupp, an
individual and Krupp GP, Inc., a Massachusetts corporation
(collectively, the "Borrowers") and Krupp Government Income
Trust, a Massachusetts business trust (the "Holder").
(99.1) Chairman of the Board Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Krupp Government Income Trust
-----------------------------
(Registrant)
BY: / s / Robert A. Barrows
----------------------------------------------------
Robert A. Barrows
Treasurer and Chief Accounting Officer
of Krupp Government Income Trust
DATE: August 13, 2002
Extension of and Second Modification to the Additional Loan Agreement
and Additional Loan Note
---------------------------------------------------------------------
This Extension of and Second Modification to the Additional Loan Agreement and
Additional Loan Note dated as of July 1, 2002 is entered into among George
Krupp, an individual, Douglas Krupp, an individual and Krupp GP, Inc., a
Massachusetts corporation (collectively, the "Borrowers") and Krupp Government
Income Trust, a Massachusetts business trust (the "Holder").
Whereas, the Borrowers and the Holder have entered into the Additional Loan
Agreement (the "Agreement") dated December 28, 1990, the Additional Loan Note
(the "Note") dated December 28, 1990 and the Modification Agreement dated May
1997;
Whereas, in accordance with the terms of the Agreement, the Note and the
Modification Agreement, unless extended, the terms of the Agreement, the Note
and the Modification Agreement expire on July 7, 2002;
Whereas, the Borrowers and the Holder have mutually agreed to extend the terms
of the Agreement, the Note and the Modification Agreement;
Now, therefore, for and in consideration of the foregoing recitals, the mutual
covenants hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Amendments. The Agreement, the Note and the Modification Agreement are amended as follows:
- -----------
Section A of the Note is amended to read in its entirety as follows:
Unless otherwise accelerated as provided herein or in the Additional Loan
Agreement, the outstanding principal balance shall be payable on September 5,
2002.
Conditions Precedent. Notwithstanding any contrary provision, this document is
not effective unless and until the Holder receives counterparts of this document
executed by each party named on the signature page or pages of this document.
Ratifications. To induce the Holder to enter into this document, the Borrowers
(a) ratify and confirm all provisions of the Agreement, the Note and the
Modification Agreement as amended by this document, (b) ratify and confirm that
all guaranties, assurances, and Liens (as defined in the Agreement, the Note and
the Modification Agreement) granted, conveyed, or assigned to the Holder under
the Agreement, the Note and the Modification Agreement (as they have been
renewed, extended, and amended) are not released, reduced, or otherwise
adversely affected by this document and continue to guarantee, assure, and
secure full payment and performance of the present and future indebtedness
arising hereunder, and (c) agree to perform those acts and duly authorize,
execute, acknowledge, deliver, file, and record those additional documents as
the Holder may request in order to create, perfect, preserve, and protect those
guaranties, assurances, and Liens.
Representations. To induce the Holder to enter into this document, the Borrowers
represent and warrant to the holder that as of the date of this document (a) the
Borrowers have all requisite authority and power to execute, deliver and perform
their respective obligations under this document, which execution, delivery, and
performance have been duly authorized by all necessary corporate action in the
case of the corporate Borrower, require no action by or filing with any
governmental authority, do not violate any of the corporate Borrower's
organizational documents or violate any law applicable to any of the Borrowers
or any material agreement to which they or their assets are bound, (b) upon
execution and delivery by all parties to it, this document will constitute the
Borrowers' legal and binding obligation, enforceable against each of them in
accordance with this document's terms except as that enforceability may be
limited by debtor relief laws and general principles of equity, (c) all other
representations and warranties in the Agreement, the Note and the Modification
Agreement are true and correct in all material respects except to the extent
that any of them speak to a different specific date, and (d) no Default or Event
of Default exists.
Miscellaneous. Except as specifically amended and modified in this document, the Agreement, the Note and the Modification Agreement
- --------------
are unchanged and continue in full force and effect.
The parties hereto have caused this Extension of and Second Modification to the
Additional Loan Agreement and Additional Loan Note to be duly executed as of the
date first written above.
Krupp GP, Inc., a Massachusetts corporation Krupp Government Income Trust,
A Massachusetts business trust
BY: / s / David C. Quade By: Berkshire Mortgage Advisors
-----------------------------------------------------
Its: Executive Vice President Limited Partnership, its Advisor
--------------------------------------------------
By: BRF Corporation, its general
/ s / Douglas Krupp partner
- ------------------------------------------------------------
Douglas Krupp, an individual
By: / s / Ronald F. Halpern
------------------------------------------------
Name:
Title:
/ s / George Krupp
- -------------------------------------------------------------
George Krupp, an individual
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Government Income Trust (the
"Trust") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas
Krupp, Chairman of the Board of the Trust, certify, pursuant to U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Trust as of June 30, 2002 (the last date of
the period covered by the Report).
/ s / Douglas Krupp
- --------------------------
Douglas Krupp,
Chairman of the Board
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Krupp Government Income Trust (the
"Trust") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
A. Barrows, Chief Accounting Officer of the Trust, certify, pursuant to U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Trust as of June 30, 2002 (the last date of
the period covered by the Report).
/ s / Robert A. Barrows
- ------------------------------
Robert A. Barrows,
Chief Accounting Officer
