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 March 31, 1998
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 (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip Code)
(617) 423-2233
(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. 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
BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
Insured Mortgages $108,335,018 $108,470,247
Additional Loans 19,209,108 19,209,108
Participating Insured Mortgages ("PIMs")(Notes 2) 48,021,559 48,112,523
Mortgage-Backed Securities ("MBS") (Note 3) 26,027,969 27,085,341
Total mortgage investments 201,593,654 202,877,219
Cash and cash equivalents 9,653,957 9,749,804
Interest receivable and other assets 1,201,142 1,294,240
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,935,600
and $6,658,224, respectively 5,330,850 5,608,226
Prepaid participation servicing fees, net of
accumulated amortization of $1,941,288 and
$1,839,070, respectively 2,147,425 2,249,643
Total assets $219,927,028 $221,779,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 8,091,136 $ 7,871,606
Other liabilities 26,180 25,414
Total liabilities 8,117,316 7,897,020
Shareholders' equity (Note 4):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 210,513,803 212,496,510
Unrealized gain on MBS 1,295,909 1,385,602
Total Shareholders= equity 211,809,712 213,882,112
Total liabilities and Shareholders'equity $219,927,028 $221,779,132
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The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME
For the Three Months
Ended March 31,
1998 1997
Revenue:
Interest income - PIMs and PIMIs:
Base interest $3,055,916 $3,278,921
Additional loan interest 108,267 633,120
Participation income 26,750 1,348,392
Interest income - MBS 519,644 526,231
Other interest income 128,420 270,394
Total revenue 3,838,997 6,057,058
Expenses:
Asset management fee to an affiliate 371,588 382,986
Expense reimbursements to affiliates 95,646 108,996
Amortization of prepaid fees and expenses 379,594 395,213
General and administrative 82,602 128,074
Total expenses 929,430 1,015,269
Net income $2,909,567 $5,041,789
Earnings per Share $ .19 $ .33
Weighted average Shares outstanding 15,053,135 15,053,135
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The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
1998 1997
Operating activities:
Net income $ 2,909,567 $ 5,041,789
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of net premium 36 945
Amortization of prepaid fees and expenses 379,594 395,213
Changes in assets and liabilities:
Decrease in interest receivable and other assets 93,098 34,178
Increase (decrease) in other liabilities 766 (21,479)
Net cash provided by operating activities 3,383,061 5,450,646
Investing activities:
Principal collections on MBS 967,643 698,831
Principal collections on PIMs and insured
mortgages 226,193 5,842,988
Collection of Additional loan - 1,540,000
Acquisition of MBS - (3,366,000)
Increase (decrease) in deferred income
on Additional Loans 219,530 (501,260)
Net cash provided by investing activities 1,413,366 4,214,559
Financing activity:
Dividends (4,892,274) (4,892,274)
Net (decrease) increase in cash and cash equivalents (95,847) 4,772,931
Cash and cash equivalents, beginning of period 9,749,804 19,053,931
Cash and cash equivalents, end of period $ 9,653,957 $23,826,862
The accompanying notes are an integral
part of the financial statements.
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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 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") of 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, 1997
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 March 31, 1998 and the results of its operations and its
cash flows for the three months ended March 31, 1998 and 1997.
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results which may be expected for the
full year. See Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report.
2. PIMs and PIMIs
At March 31, 1998, the Trust=s PIMs and PIMIs have a fair value of
approximately $169,173,339 and gross unrealized gains and losses of
approximately $380,609 and $6,772,955, respectively. The PIMs and PIMIs
have maturities ranging from 2002 to 2034. At March 31, 1998 there are no
insured mortgage loans within the Trust s portfolio that are delinquent
of principal or interest.
3. MBS
At March 31, 1998, the Trust=s MBS portfolio has an amortized cost of
approximately $24,732,060 and unrealized gains of $1,295,909. The MBS
portfolio has maturities ranging from 2008 to 2029.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for three months ended March
31, 1998 is as follows:
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain Equity
Balance at December 31, 1997 $212,496,510 $ - $ 1,385,602 $213,882,112
Net income - 2,909,567 - 2,909,567
Dividends (1,982,707)(2,909,567) - (4,892,274)
Decrease in unrealized
gain on MBS - - (89,693) (89,693)
Balance at March 31, 1998 $210,513,803 $ - $1,295,909 $211,809,712
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KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, continued
5. Related Party Transactions
During the three months ended March 31, 1998 and 1997, the Trust received
$86,609 and $77,484, respectively, of interest income on Additional Loans from
an affiliate of the Advisor. In addition, the Trust received $26,749 and $0,
respectively, related to participation interest income for the three months
ended March 31, 1998 and 1997.
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and
future events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
Liquidity and Capital Resources
The most significant demand on the Trust's liquidity is dividends paid to
investors of approximately $4.9 million per quarter. The Trust currently has
an annual dividend rate of $1.30 per share, paid in quarterly installments of
$.325 per share. Funds for dividends come from interest income received on
PIMs, PIMIs, MBS, 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 Trust's investments in PIMs and PIMIs, in addition to providing
guaranteed or insured monthly principal and interest payments, may provide
the Trust with additional income through participation in the cash generated
by the operations of the underlying properties and a portion of the
appreciation realized upon the sale or refinancing of the underlying
properties. The Trust's participation interests and the interest payments
on the Additional Loan portion of the PIMIs are neither insured nor
guaranteed and will depend primarily on the successful operation of the
underlying properties. Seven of the Trust's eight PIMIs funded the
construction of multi-family housing, which require time to achieve
stabilized operations following completion of construction. With this in
mind,the Trust required the borrowers to establish reserves and escrows with
Additional Loan proceeds to provide funds for the Additional Loan base
interest payments during the construction and lease-up periods. As these
reserves become depleted, full payment of the Additional Loan base interest
will depend primarily on whether the underlying property can generate
sufficient operating cash flow. For 1998, Mountain View and Red Run have
sufficient escrows to make the required Additional Loan base interest payments
if operations can not support such payments. In addition,the Trust received
the scheduled semi-annual interest payments on the Additional Loans related
to Park Highlands and The Season. The workouts related to Lifestlyes and
Windward Lakes will only be paid if there is any surplus cash generated from
each of the propertys operations. Management is closely monitoring the
operating performances of the remaining properties.
Overall, the Trust's ability to meet its objectives will depend primarily
on the operating performance of the properties underlying the PIMs and PIMIs.
Park Highlands is being marketed for a sale. The borrower on the PIMI has
informed the Advisor that he expects a sale transaction may be completed
during the second quarter 1998, and the first mortgage loan and the Additional
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Loan will be paid off. Should a sale transaction occur, the Trust will
receive its preferred return as well as its share of any increase in the
property s value, as it is determined by the purchase price.
Coconut Palm Club continues to generate operating deficits. The local
market remains highly competitive, and Coconut Palm Club must compete against
affordable single-family homes as well as other apartment communities, either
newly built or recently renovated. Coconut Palm Club is unable to generate
sufficient operating income to correct deferred maintenance items that
adversely affect the market s perception of the property or to launch an
aggressive marketing campaign to draw more traffic to the property. The
borrower on the Coconut Palm Club PIMI is still searching for
additional equity to bring into the deal, and the Advisor expects to
negotiate a loan restructure to provide some interim debt service relief
until the market stabilizes.
For the first five years of the PIMs and PIMIs the borrowers are prohibited
from repaying.For the second five years, the borrowers can repay the loans
and pay the greater of a prepayment penalty or all participation interest for
PIMs, or by paying all amounts due under the PIMIs and satisfying the required
preferred return. The participation features and Additional Loans are neither
insured nor guaranteed and if repayment of a PIM or PIMI results from
foreclosure on the underlying property or an insurance claim the Trust would
not receive any participation interest or any amounts due under the Additional
Loan. The Trust has the option to call PIMs and PIMIs by accelerating their
maturity if the loans are not repaid by the tenth year after permanent
funding. The Trust will determine the merits of exercising the call option
for each PIM or PIMI as economic conditions warrant. Such factors as the
condition of the asset, local market conditions, interest rates and available
financing will have an impact on this decision.
Assessment of Credit Risk
The Trust's investments in mortgages are guaranteed or insured by the
Federal National Mortgage Association ( FNMA ),the 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.
FNMA 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 an 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,
maintain the properties and obtain adequate insurance coverage; adverse
changes in general economic conditions,adverse local conditions, and changes
in governmental regulations, real estate zoning laws, or tax laws;and other
circumstances over which the Trust may have little or no control.
The Trust includes in cash and cash equivalents approximately $8 million of
commercial paper,which is issued by entities with a credit rating equal to
one of the top two rating categories of a nationally recognized statistical
rating organization.
Operations
The following discussion relates to the operations of the Trust during the
three months ended March 31, 1998 and 1997
Net income for the first quarter of 1998 decreased by approximately $2,132,000
as compared to the first quarter of 1997 primarily due to the Timber Ridge
PIMI prepayment during the first quarter of 1997. The decreases in
participation income, additional loan interest and base interest of
$1,322,000, $525,000 and $223,000, respectively, due to the borrower of the
Timber Ridge PIMI prepaying the first mortgage and Additional Loan during the
first quarter of 1997. Other interest income also decreased due to the Trust
having lower short-term investment balances during the first quarter of 1998
when compared to the corresponding period in 1997 as a result of the special
dividend of $13.8 million.This special dividend occurred during the 3rd
quarter of 1997 and was funded from the prepayment proceeds from the Timber
Ridge PIMI and Canyon Ridge PIM.These decreases were slightly offset by
lower total expenses of $86,000. The Trust generally funds a portion of its
dividends with principal collections which will continue to reduce the assets
of the Trust thereby reducing the income generated by the Trust in the future.
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KRUPP GOVERNMENT INCOME TRUST
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
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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: April 23, 1998
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