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 ------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- --------------------------- Commission file number 0-19244 ----------------------- 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 ----- -----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 -------------- --------------- 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
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10-Q Filing
Krupp Government Income Trust (KRPI) Inactive 10-Q2002 Q2 Quarterly report
Filed: 14 Aug 02, 12:00am