UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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.)
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. 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,
1999 1998
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
Insured Mortgages $75,282,186 $75,386,460
Additional Loans, net of impairment provision
of $2,114,346 11,243,862 11,243,862
Participating Insured Mortgages ("PIMs")(Notes 2) 47,639,105 47,737,583
Mortgage-Backed Securities ("MBS") (Note 3) 20,587,263 22,132,858
Total mortgage investments 154,752,416 156,500,763
Cash and cash equivalents 9,145,850 9,004,397
Interest receivable and other assets 1,071,476 1,057,365
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,341,302
and $6,125,191, respectively 3,229,494 3,445,605
Prepaid participation servicing fees, net of
accumulated amortization of $1,856,380 and
$1,776,625, respectively 1,333,804 1,413,559
Total assets $169,533,040 $171,421,689
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 5,853,511 $ 5,773,669
Other liabilities 702,580 33,230
Total liabilities 6,556,091 5,806,899
Shareholders' equity (Note 4):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 162,155,706 164,742,014
Accumulated comprehensive income 821,243 872,776
Total Shareholders= equity 162,976,949 165,614,790
Total liabilities and Shareholders'equity $ 169,533,040 $171,421,689
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,
1999 1998
Revenue:
Interest income - PIMs and PIMIs:
Basic interest $ 2,345,840 $3,055,916
Additional loan interest 108,267 108,267
Participation income - 26,750
Interest income - MBS 410,032 519,644
Interest income cash and cash equivalents 108,030 128,420
Total revenue 2,972,169 3,838,997
Expenses:
Asset management fee to an affiliate 289,602 371,588
Expense reimbursements to affiliates 18,215 95,646
Amortization of prepaid fees and expenses 295,866 379,594
General and administrative 62,521 82,602
Total expenses 666,204 929,430
Net income $ 2,305,965 $ 2,909,567
Basic earnings per Share $ .15 $ .19
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 Three Months
Ended March 31,
1999 1998
Operating activities:
Net income 2,305,965 $ 2,909,567
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of premium and discounts 351 36
Amortization of prepaid fees and expenses 295,866 379,594
Changes in assets and liabilities:
Decrease (increase) in interest receivable and
other assets (14,111) 93,098
Increase in other liabilities 669,350 766
Net cash provided by operating activities 3,257,421 3,383,061
Investing activities:
Principal collections on MBS 1,493,711 967,643
Principal collections on PIMs and insured
mortgages 202,752 226,193
Increase in deferred income
on Additional Loans 79,842 219,530
Net cash provided by investing activities 1,776,305 1,413,366
Financing activity:
Dividends (4,892,273) (4,892,274)
Net increase (decrease) in cash and cash equivalents 141,453 (95,847)
Cash and cash equivalents, beginning of period 9,004,397 9,749,804
Cash and cash equivalents, end of period $ 9,145,850 $ 9,653,957
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 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,
1998 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, 1999 and the results of its operations and
its cash flows for the three months ended March 31, 1999 and 1998. The results
of operations for the three months ended March 31, 1999 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, 1999, the Trust's PIMs and PIMIs have a fair value of approximately
$137,899,000 and gross unrealized gains of approximately $3,734,000. The PIMs
and PIMIs have maturities ranging from 2002 to 2034. At March 31, 1999 there are
no insured mortgage loans within the Trust's portfolio that are delinquent of
principal or interest.
3. MBS
At March 31, 1999, the Trust's MBS portfolio has an amortized cost of
$19,766,020 and unrealized gains and losses of $828,759 and $7,516,
respectively. 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,
1999 is as follows:
Total Accumulated
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
Balance at December 31, 1998 $164,742,014 $ - $ 872,776 $165,614,790
Net income - 2,305,965 - 2,305,965
Dividends (2,586,308) (2,305,965) - (4,892,273)
Decrease in unrealized
gain on MBS - - (51,533) (51,533)
Balance at March 31, 1999 $162,155,706 $ - $ 821,243 $ 162,976,949
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, continued
5. Related Party Transactions During the three months ended March 31, 1999 and
1998, the Trust received $86,609 and $86,609, respectively, of interest income
on Additional Loans from an affiliate of the Advisor. In addition, the Trust
received $26,749 related to participation interest income for the three months
ended March 31, 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and future
events. These forward looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
The Advisor of the Trust has conducted an assessment of the Trust's core
internal and external computer information systems and has taken the further
necessary steps to understand the nature and extent of the work required to make
its systems Year 2000 ready in those situations in which it is required to do
so. The Year 2000 readiness issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations.
In this regard, the Advisor of the Trust, along with certain affiliates,
upgraded the computer hardware and software during 1997 and 1998. As a result,
the Advisor has generated operating efficiencies and believes its financial
accounting operating systems are Year 2000 ready.
The Advisor of the Trust is evaluating the potential adverse impact that could
result from the failure of material third-party service providers (including but
not limited to its banks and telecommunications providers) and significant
vendors to be Year 2000 ready. The Trust is surveying these third party
providers and assessing their readiness with year 2000. To date, the Trust is
not aware of any problems that would materially impact its results of
operations, liquidity or capital resources. However, the Trust has not yet
obtained all written assurances that these providers would be Year 2000 ready.
The Trust currently does not have a contingency plan in the event of a
particular provider or system not being Year 2000 ready. Such plan will be
developed if it becomes clear that a provider is not going to achieve its
scheduled readiness objectives by June 30, 1999. The inability of one of these
providers to complete its Year 2000 resolution process could impact the Trust.
In addition, the Trust is also subject to external forces that might generally
affect industry and commerce, such as utility and transportation company Year
2000 readiness failures and related service interruptions. No estimate can be
made at this time as to the impact of the readiness of such third parties.
Liquidity and Capital Resources
At March 31, 1999 the Trust has significant liquidity consisting of cash and
cash equivalents, of approximately $9.1 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 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 Advisor of the Trust periodically reviews the
dividend rate to determine whether an adjustment to the dividend rate is
necessary based on projected future cash flows. Based on current projections,
the Advisor believes the Trust can maintain the current dividend rate for the
foreseeable future. In general, the Advisor tries to set a dividend rate that
provides for level quarterly distributions. To the extent quarterly dividends do
not fully utilize the cash available for distribution and cash balances
increase, the Advisor may adjust the dividend rate or distribute such funds
through a special distribution.
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.
The Advisor continues to monitor the operations of the Lifestyles and Windward
Lakes PIMIs that are operating under workout arrangements. Through the first
quarter of 1999 the operations of these properties have remained stable. In
1998, the borrower of the Audubon Villas PIMI notified the Trust of its
intention to prepay this PIMI. At this time the Advisor cannot determine if a
prepayment will actually occur, but in the event of a prepayment the Advisor
anticipates the Trust will receive a substantial amount of participation income.
The Trust is in the process of negotiating debt service relief with the borrower
of the Mountain View Apartments PIMI and hopes to conclude these negotiations
during the second quarter. The Trust anticipates reducing the interest rate by
1.25% per annum and having the borrower make base interest payments on the
Additional Loan to the extent the property generates surplus cash. The Seasons
PIMI continues to perform well and is generating sufficient cash flow from
property operations to make the base interest payments on the Additional Loan.
The property underlying the Red Run PIMI is generating cash flow from operations
to fund a portion of its Additional Loan base interest payments and has
sufficient escrows to make up any shortfalls in base interest payments during
1999.
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 insured mortgages and MBS are guaranteed or insured
by Fannie Mae, the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Government National Mortgage Association (AGNMA@) or the Department of Housing
and Urban Development ("HUD") and the certainty of 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 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 ability to maintain
occupancy levels, control operating expenses, maintain the property 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 $8.4 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
Net income for the first quarter of 1999 decreased by approximately $604,000 as
compared to the first quarter of 1998 due primarily to lower basic interest on
PIMs and PIMIs caused by the prepayments of the Coconut Club and Park Highland
PIMIs in 1998. Additionally these prepayments reduced the Trust's investment in
mortgages, which contributed to the $82,000 decline in asset management fees
during the first quarter of 1999 versus the first quarter of 1998. Amortization
expense decreased $84,000 in 1999 as compared to 1998 due to fully amortizing
the prepaid fees and expenses associated with the Coconut Club and Park Highland
PIMIs in 1998. Expense reimbursements to affiliates decreased $77,000 during
1999 as compared to 1998 due primarily to a $49,000 rebate related to 1998
expense reimbursements.
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. Additionally, asset management fees
will decrease as the Trust's investments in MBS, PIMs and insured mortgages
continue to decline as a result of principal collections.
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
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 30, 1999