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 September 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20164
Krupp Government Income Trust II
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-3073045
(IRS employer identification no.)
One Beacon Street, Boston, Massachusetts
(Address of principal executive offices)
02108
(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 NoPart I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein.
KRUPP GOVERNMENT INCOME TRUST II BALANCE SHEETS ASSETS September 30, December 31, 2001 2000 ------------- --------------- Participating Insured Mortgage Investments ("PIMIs")(Note 2) Insured mortgages $ 85,925,543 $ 121,208,064 Additional loans, net of impairment provision of $1,437,500 and $2,000,000, respectively 16,717,000 22,292,351 Participating Insured Mortgages ("PIMs")(Note 2) 37,340,539 37,631,330 Mortgage-Backed Securities ("MBS")(Note 3) 16,661,418 19,124,031 ------------- --------------- Total mortgage investments 156,644,500 200,255,776 Cash and cash equivalents 7,906,904 7,089,453 Prepaid acquisition fees and expenses, net of accumulated amortization of $7,704,495 and $8,957,065, respectively 3,173,693 4,838,771 Prepaid participation servicing fees, net of accumulated amortization of $2,333,045 and $2,711,086, respectively 1,190,127 1,784,633 Interest receivable and other assets 1,021,266 1,552,568 -------------- --------------- Total assets $ 169,936,490 $ 215,521,201 ============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans (Note 2) $ 1,242,282 $ 2,503,604 Other liabilities 403,409 153,273 -------------- --------------- Total liabilities 1,645,691 2,656,877 -------------- --------------- Shareholders' equity (Note 4) Common stock, no par value; 25,000,000 Shares authorized; 18,371,477 Shares issued and outstanding 167,836,673 212,783,023 Accumulated comprehensive income 454,126 81,301 -------------- --------------- Total Shareholders' equity 168,290,799 212,864,324 -------------- --------------- Total liabilities and Shareholders' equity $ 169,936,490 $ 215,521,201 ============== =============== The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------------------------------------------------------- --------- 2001 2000 2001 2000 -------------- --------------- -------------- -------------- Revenues: Interest income - PIMs and PIMIs: Basic interest $ 2,242,454 $ 2,811,216 $ 7,543,463 $ 8,456,060 Additional loan interest 907,038 474,684 1,968,997 1,315,467 Participation interest 9,248,722 270,606 11,873,054 1,651,508 Interest income - MBS 272,019 359,862 920,710 1,111,168 Interest income - cash and cash equivalents 138,024 115,312 338,914 360,398 -------------- --------------- -------------- -------------- Total revenues 12,808,257 4,031,680 22,645,138 12,894,601 -------------- --------------- -------------- -------------- Expenses: Asset management fee to an affiliate 299,650 383,360 1,012,248 1,147,883 Expense reimbursements to affiliates 75,192 78,825 192,367 221,528 Amortization of prepaid fees and expenses 923,775 441,591 2,259,584 1,690,156 General and administrative 160,639 124,313 389,619 351,305 Reduction of provision for impaired additional loan (Note 2) (562,500) - (562,500) - -------------- --------------- -------------- -------------- Total expenses 896,756 1,028,089 3,291,318 3,410,872 -------------- --------------- -------------- -------------- Net income 11,911,501 3,003,591 19,353,820 9,483,729 Other comprehensive income: Net change in unrealized gain/loss on MBS 323,641 214,289 372,825 186,205 -------------- --------------- -------------- -------------- Total comprehensive income $ 12,235,142 $ 3,217,880 $ 19,726,645 $ 9,669,934 ============== =============== ============== ============== Basic earnings per Share $ .64 $ .17 $ 1.05 $ .52 ============== =============== ============== ============== Weighted average shares outstanding 18,371,477 18,371,477 ========== ========== The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, ---------------------------------- 2001 2000 ------------- ------------ Operating activities: Net income $ 19,353,820 $ 9,483,729 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of net premium 61,243 41,351 Amortization of prepaid fees and expenses 2,259,584 1,690,156 Reduction of provision for impaired additional loan (562,500) - Changes in assets and liabilities: Decrease in interest receivable and other assets 531,302 761,315 (Decrease) increase in deferred income on Additional Loans (1,261,322) 33,252 Increase (decrease) in other liabilities 250,136 (6,256) ------------- ------------- Net cash provided by operating activities 20,632,263 12,003,547 ------------- ------------- Investing activities: Principal collections on MBS 2,774,005 1,906,136 Principal collections on Additional Loans 6,137,851 - Principal collections on PIMs and Insured Mortgages 35,573,502 10,459,746 ------------- ------------- Net cash provided by investing activities 44,485,358 12,365,882 ------------- ------------- Financing activity: Dividends (64,300,170) (25,352,639) ------------- ------------- Net increase (decrease) in cash and cash equivalents 817,451 (983,210) Cash and cash equivalents, beginning of period 7,089,453 8,653,673 ------------- ------------- Cash and cash equivalents, end of period $ 7,906,904 $ 7,670,463 ============= ============= Non cash activities: Increase in fair value of MBS $ 372,825 $ 186,205 ============= ============= The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS 1. Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in the opinion of Berkshire Mortgage Advisors Limited Partnership (the "Advisor"), which is the advisor to Krupp Government Income Trust II (the "Trust"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Financial Statements in the Trust's Form 10-K for the year ended December 31, 2000 for additional information relevant to significant accounting policies followed by the Trust. In the opinion of the Advisor of the Trust, the accompanying unaudited financial statements reflect all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the Trust's financial position as of September 30, 2001, the results of its operations for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 2001 and 2000. The results of operations for the three and nine months ended September 30, 2001 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 September 30, 2001, the Trust's PIMs and PIMIs, including Additional Loans, had a fair value of $143,900,624 and gross unrealized gains of $3,917,542. The PIMs and PIMIs had maturities ranging from 2006 to 2036. At September 30, 2001, there were no insured mortgage loans within the Trust's portfolio that were delinquent of principal or interest. On July 25, 2001, the Trust finalized an agreement with the owner of the Windmill Lakes property which will allow for the release of the participation features on the PIMI in the event that the first mortgage, the Additional Loan and any accrued but unpaid base interest on the Additional Loan are all paid off by September 1, 2002. In addition, the Trust required the owner to bring current the unpaid additional loan base interest as of March 1, 2001 which was due totaling $512,500. In the event that the required payments are not received, the participation features will remain in force. As a result of the performance of the property, the Trust initially established a valuation allowance of $2,000,000 on the Additional Loan in 1998. The Trust has reflected the $512,500 received plus $50,000 previously received as a reduction in the principal balance of the Additional Loan and related impairment provision. The payoff of the Seasons PIMI was a result of the sale of the underlying property by the borrower, Maryland Associates Limited Partnership ("MALP"), which is an affiliate of the Adviser, to an affiliate of MALP's general partner. Because the sale of the underlying property was to an affiliate, the Independent Trustees of the Trust were required to approve the transaction, which they did based upon a number of factors, including an appraisal of the underlying property prepared by an independent third party MAI appraiser. The purchase price paid by the affiliate for the underlying property was $1.6 million greater than the value indicated by such appraisal. On July 23, 2001, the Trust received a prepayment of the Seasons Subordinated Promissory Note and the Seasons Additional Loan Note. The Trust received $4,925,351 of the Additional Loan principal, $462,983 of surplus cash, $2,168,701 of Preferred Interest, $2,693,326 of contingent interest, $176,908 of Base Interest on Additional Loan and $3,325,696 which represents the Trust's portion of the residual split. The Trust received $21,926,006 representing the principal proceeds on the first mortgage note on July 26, 2001. In addition, the Trust recognized $624,023 of Additional Loan interest that had been previously received and recorded in deferred income on additional loans. The Advisor paid a special dividend of $1.95 per share on August 17, 2001 from the proceeds of the Seasons PIMI prepayment. Continued
KRUPP GOVERNMENT INCOME TRUST II NOTES TO FINANCIAL STATEMENTS, Continued 2. PIMs and PIMIs, continued During the first quarter of 2001, the Trust received a payoff of the Hunters Pointe PIMI. The Trust received the outstanding balance on the insured mortgage of $12,347,267, the outstanding balance on the Additional Loan of $650,000, Participating Income Interest of $496,207 (including all of the delinquent amounts), Preferred Interest of $492,543, Participating Appreciation Interest of $1,070,304 and late fees on the delinquent Participating Income Interest of $11,021. In addition, the Trust recognized $196,710 of additional loan interest and $311,132 of Participating Income Interest that had been previously received and recorded in deferred income on additional loans. On March 20, 2001, the Trust paid a special dividend of $.83 per share from the proceeds of the Hunters Pointe PIMI payoff. 3. MBS At September 30, 2001, the Trust's MBS portfolio had an amortized cost of approximately $16,207,292 and gross unrealized gains of approximately $454,126. The MBS portfolio had maturities ranging from 2008 to 2031. 4. Changes in Shareholder's Equity A summary of changes in Shareholders' equity for the nine months ended September 30, 2001 is as follows: Accumulated Total Common Retained Comprehensive Shareholders' Stock Earnings Income Equity -------------- -------------- ------------- ---------------- Balance at December 31, 2000 $ 212,783,023 $ - $ 81,301 $ 212,864,324 Net income - 19,353,820 - 19,353,820 Dividends (44,946,350) (19,353,820) - (64,300,170) Change in unrealized gain on MBS - - 372,825 372,825 -------------- -------------- -------------- ---------------- Balance at September 30, 2001 $ 167,836,673 $ - $ 454,126 $ 168,290,799 ============== ============== ============== ================ 5. Related Party Transactions The Trust received $176,908 and $221,641 of Additional Loan Interest during the three months ended September 30, 2001 and 2000, respectively, from an affiliate of the Advisor. The Trust also received participation interest of $8,650,706 and $270,606 from an affiliate of the Advisor during the three months ended September 30, 2001 and 2000, respectively. The Trust received $398,549 and $443,282 of Additional Loan Interest from an affiliate of the Advisor during the nine months ended September 30, 2001 and 2000, respectively. The Trust also received participation interest of $8,780,579 and $446,574 from an affiliate of the Advisor during the nine months ended September 30, 2001 and 2000, respectively.
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 quarterly 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 September 30, 2001 the Trust had liquidity consisting of cash and cash equivalents, of approximately $7.9 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 paid to investors of approximately $4.4 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 $.24 per Share per quarter. The Trustees, based on the Advisor's recommendations, generally 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 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 the PIMs and PIMIs also may provide additional income through the interest on the Additional Loan portion of the PIMIs as well as participation income based on 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.
The payoff of the Seasons PIMI was a result of the sale of the underlying property by the borrower, Maryland Associates Limited Partnership ("MALP"), which is an affiliate of the Adviser, to an affiliate of MALP's general partner. Because the sale of the underlying property was to an affiliate, the Independent Trustees of the Trust were required to approve the transaction, which they did based upon a number of factors, including an appraisal of the underlying property prepared by an independent third party MAI appraiser. The purchase price paid by the affiliate for the underlying property was $1.6 million greater than the value indicated by such appraisal.
On July 23, 2001, the Trust received a prepayment of the Seasons Subordinated Promissory Note and the Seasons Additional Loan Note. The Trust received $4,925,351 of the Additional Loan principal, $462,983 of surplus cash, $2,168,701 of preferred interest, $2,693,326 of contingent interest, $176,908 of unpaid Base Interest on Additional Loan and $3,325,696 which represents the Trust's portion of the residual split. The Trust received $21,926,006 representing the principal proceeds on the first mortgage note on July 26, 2001. In addition, the Trust recognized $624,023 of Additional Loan interest that had been previously received and recorded in deferred income on additional loans. The Advisor paid a special dividend of $1.95 per share on August 17, 2001 from the proceeds of the Seasons PIMI prepayment.
In addition to the amounts received from the payoffs of the Seasons and Hunters Pointe PIMIs, the Trust received both installments of Additional Loan interest due in 2001 from four of the PIMI investments and the first installment on one other PIMI during the nine months ended September 30, 2001. For the PIMI that has only paid the first installment, the Trust received the second installment in October. During 1999, the Advisor determined that the borrower on the Norumbega PIMI had paid Additional Loan interest from funds other than surplus cash, which resulted in overpayments during the previous three years; consequently, the Trust will not receive any Additional Loan interest until the overpayment has been absorbed.
The Trust received participation interest based on cash flow generated by property operations from four of its investments during the nine months ended September 30, 2001. Sunset Summit paid $113,253, Martin's Landing paid $217,585, the Lakes paid $380,431 and the Seasons paid $129,872 In addition, the Trust received and recognized participation interest related to the payoffs of the Seasons and Hunters Pointe PIMIs.
Windmill Lakes is a twelve-year old, basic apartment community that has not been able to compete against the influx of new apartment communities that have extensive amenity packages. 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. During the fourth quarter of 2000, occupancy was in the 70% 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. The borrower on the Windmill Lakes PIMI has been unable to secure a purchaser for the property at a price high enough to cover all of the ownership entity's outstanding liabilities and has decided to sell the apartments off as condominiums. Converting a multifamily property to condominium ownership is often a long process that requires resources and expertise in marketing, financing, legal matters and construction. Local and state agencies regulate the conversion of existing housing into condominium ownership, and there are various compliance regulations governing the process as well. On July 25, 2001, the borrower finalized an agreement with the Trust which will allow for the release of the participation features on the PIMI in the event that the first mortgage, the additional loan and any accrued but unpaid base interest on the additional loan are paid in full by September 1, 2002. In addition, the Trust required the owner to bring current the unpaid additional loan base interest as of March 1, 2001 which was due totaling $512,500. In the event that the required payments are not received, the participation features will remain in force. As a result of the performance of the property, the Trust initially established a valuation allowance of $2,000,000 on the Additional Loan in 1998. The Trust has reflected the $512,500 received plus $50,000 previously received as a reduction in the principal balance of the Additional Loan and related impairment provision.
In November 1999, the Trust notified the borrower on the Falls at Hunters Pointe PIMI that he was in default for non-payment of participating interest due to the Trust based on 1997 and 1998 operating results. The borrower failed to cure the default. Consequently, the Trust elected to use a portion of the borrower's funds held in escrow to cure the 1997 portion of the default. The Borrower remained in default for 1998 and 1999 operating results. The Trust filed a complaint against the partners of the borrowing entity to collect the delinquent participation interest related to 1998 and 1999 operations along with late payment penalties and legal fees. In response to this action, the borrower on the PIMI put the property up for sale. During the first quarter of 2001, the Trust received a payoff of the Falls at Hunters Pointe PIMI as a result of the sale of the property. The Trust received the outstanding balance on the insured mortgage of $12,347,267, the outstanding balance on the Additional Loan of $650,000, Participating Income Interest on the Additional Loan of $496,207 (including all of the delinquent amounts), Preferred Interest on the Additional Loan of $492,543, Participating Appreciation Interest on the subordinate loan agreement of $1,070,304 and late fees on the delinquent Participating Income Interest of $11,021. In addition, the Trust recognized $196,710 of additional loan interest and $311,132 of Participating Income Interest that had been previously received and recorded in deferred income on additional loans. On March 20, 2001, the Trust paid a special dividend of $.83 per share from the proceeds of the Falls at Hunters Pointe PIMI payoff.
Whether the operating performance of any of the properties mentioned above will provide sufficient cash flow from operations to pay either the Additional Loan interest or participation income will depend on factors over which 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 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 premium or the participation income due at the time of the prepayment. Similarly, the PIMI borrowers can prepay the insured 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.
Results of Operations
The Trust's net income increased in the three months ended September 30, 2001 as compared to September 30, 2000 primarily due to increases in Additional Loan and participation interest on PIMs and PIMIs and decreases in asset management fees and the provision for impaired mortgage loan. This was partially offset by an increase in amortization expense and a decrease in basic interest from PIMs and PIMIs. Additional Loan and participation interest increased primarily due to the Seasons payoff in July 2001. Asset management fees decreased due to the decrease in the Trust's investments as a result of the Seasons payoff in July 2001 and the Falls at Hunters Pointe payoff in March 2001. The payoffs also caused basic interest from PIMs and PIMIs to decrease and amortization expense increased as the prepaid fees and expenses associated with the Seasons PIMI were fully amortized. The provision for impaired mortgage decreased due to the reduction of the impairment provision for the Windmill Lakes PIMI in the third quarter of 2001.
The Trust's net income increased in the nine months ended September 30, 2001 as compared to September 30, 2000 primarily due to increases in Additional Loan and participation interest on PIMs and PIMIs and decreases in asset management fees and the provision for impaired mortgage loan. This was partially offset by an increase in amortization expense and a decrease in basic interest from PIMs and PIMIs. Additional Loan and participation interest increased primarily due to the Seasons payoff in July 2001 and the Falls at Hunters Pointe payoff in March 2001. Asset management fees decreased due to the decrease in the Trust's investments as a result of the payoffs mentioned above. The payoffs also caused basic interest from PIMs and PIMIs to decrease and amortization expense to increase as the prepaid fees and expenses associated with these PIMIs were fully amortized. The provision for impaired mortgage decreased due to the reduction of the impairment provision for the Windmill Lakes PIMI in the third quarter of 2001.
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, the Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage Association (GNMA) or 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 upon the creditworthiness of these institutions.
Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. However, obligations of Fannie Mae 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. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represent interests in pooled mortgages insured by HUD. HUD, an agency of the U.S. Government, insures the obligations originated under its programs, which are backed by the full faith and credit of the U.S. Government.
The Trust's Additional Loans have similar risks as those associated with higher risk debt instruments, including: reliance on the owner's operating skills, 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 $6.9 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 September 30, 2001, 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 dividend 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 II PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Krupp Government Income Trust II -------------------------------- (Registrant) BY: / s / Robert A. Barrows ------------------------------------- Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Government Income Trust II. DATE: November 2, 2001
(Unaudited) Amounts in thousands, except per Share amounts) Period Inception Ended Through 9/30/01 9/30/01 Distributable Cash Flow (a): - --------------------------- Net income $ 19,353 $ 144,803 Items providing or not requiring (not providing) the use of operating funds: Additional Loan Base interest collected and reflected as Reduction of provision for impaired mortgage loan 562 562 Provision for impaired mortgage loans (562) 1,438 Loss on sale of MBS - 1,379 Amortization of prepaid fees and expenses and organization costs 2,260 17,664 Additional Loan interest received and deferred, net (1,262) 1,242 -------- ----------- Total Distributable Cash Flow ("DCF") $ 20,351 $ 167,088 ======== =========== DCF per Share based on Shares outstanding at September 30, 2001 (18,371,477) $ 1.12 $ 9.10(d) ======== =========== Dividends: Total dividends to Shareholders $ 64,299(b) $ 323,182(c) ======== =========== Average dividend per Share based on Shares outstanding at September 30, 2001 $ 3.50(b) $ 17.59(c)(d) ======== =========== (a) Distributable Cash Flow consists of income before provision for impaired mortgage loans, Loss on sale of MBS, 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 through September 2001 except the February 2001 quarterly dividend and includes an estimate of the November 2001 quarterly dividend. (c) Includes an estimate of the November 2001 quarterly dividend. (d) Shareholders average per Share return of capital on a cash basis as of September 2001 is $8.49 [$17.59 - $9.10 ]. 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.