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 June 30, 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 (IRS employer identification no.)
of incorporation or organization)
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
June 30, December 31,
1999 1998
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
Insured Mortgages $ 75,175,715 $ 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) 47,538,654 47,737,583
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 19,349,413 22,132,858
Total mortgage investments 153,307,644 156,500,763
Cash and cash equivalents 7,475,528 9,004,397
Interest receivable and other assets 1,014,211 1,057,365
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,557,413
and $6,125,191, respectively 3,013,383 3,445,605
Prepaid participation servicing fees, net of
accumulated amortization of $1,936,134 and
$ 1,776,625, respectively 1,254,050 1,413,559
Total assets $ 166,064,816 $ 171,421,689
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans
(Note 5) $ 5,958,322 $ 5,773,669
Other liabilities 124,962 33,230
Total liabilities 6,083,284 5,806,899
Shareholders' equity (Note 4):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 159,392,153 164,742,014
Accumulated comprehensive income 589,379 872,776
Total Shareholders' equity 159,981,532 165,614,790
Total liabilities and Shareholders'
equity $ 166,064,816 $ 171,421,689
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,
1999 1998 1999 1998
Revenues:
Interest income - PIMs
and PIMIs:
Basic interest $ 2,288,267 $ 2,955,766 $ 4,634,107 $ 6,011,682
Additional Loan
Interest 79,398 2,754,049 187,665 2,862,316
Participation income 75,020 4,871,325 75,020 4,898,075
Interest income - MBS 390,263 498,604 800,295 1,018,248
Other interest income 97,134 257,217 205,164 385,637
Total revenues 2,930,082 11,336,961 5,902,251 15,175,958
Expenses:
Asset management fee
to an affiliate 290,685 359,209 580,287 730,797
Expense reimbursements
to affiliates 67,479 (27,525) 85,694 68,121
Amortization of prepaid
fees and expenses 295,865 1,259,126 591,731 1,638,720
General and
administrative 147,333 141,447 209,854 224,049
Total expenses 801,362 1,732,257 1,467,566 2,661,687
Net income 2,128,720 9,604,704 4,434,685 12,514,271
Other comprehensive income:
Net change in unrealized
gain on MBS (231,864) 25,408 (283,397) (64,285)
Total comprehensive income $ 1,896,856 $ 9,630,112 $ 4,151,288 $ 12,449,986
Basic earnings per Share $ .14 $ .64 $ .29 $ .83
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,
1999 1998
Operating activities:
Net income $ 4,434,685 $ 12,514,271
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of net premium 2,194 -
Amortization of prepaid fees and expenses 591,731 1,638,720
Changes in assets and liabilities:
Decrease in interest receivable and other
assets 43,154 117,370
Increase (decrease) in other liabilities 91,732 (8,453)
Net cash provided by operating activities 5,163,496 14,261,908
Investing activities:
Principal collections on MBS 2,497,854 2,151,336
Insured mortgage prepayment - 16,752,295
Principal collections on PIMs 409,674 449,695
Collection of Additional Loan - 5,850,900
Increase (decrease) in deferred income on
Additional Loans 184,653 (2,293,297)
Net cash provided by investing activities 3,092,181 22,910,929
Financing activity:
Dividends (9,784,546) (9,784,546)
Net (decrease) increase in cash and cash equivalents (1,528,869) 27,388,291
Cash and cash equivalents, beginning of period 9,004,397 9,749,804
Cash and cash equivalents, end of period $ 7,475,528 $ 37,138,095
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"), 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, 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 June 30, 1999, its results of operations for
the three and six months ended June 30, 1999 and 1998, and its cash flows for
the six months ended June 30, 1999 and 1998. The results of operations for the
three and six months ended June 30, 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
In June 1999, the Trust entered into a second modification agreement (the
"Agreement") with the borrowers of the Mountain View Apartments PIMI reducing
the interest rate on the insured mortgage by 1.25% per annum beginning January
1, 1999 and continuing through December 31, 2004 and changing the participation
features. The Agreement eliminated the Preferred Interest required under the
Additional Loan and changed the Trust's participation in the surplus cash
generated by property. Under the Agreement, 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 the base interest on the Additional Loan. Unpaid Additional
Loan base interest will accrue and be payable if there are sufficient proceeds
from a sale or refinancing of the property except that $288,580 of existing
accruals related to the Additional Loan have been forgiven. In addition, the
borrower will repay $153,600 of the Additional Loan and fund approximately
$54,000 to a reserve for property improvements.
At June 30, 1999, the Trust's PIMs and PIMIs have a fair value of
approximately $135,403,097 and gross unrealized gains and losses of
approximately $2,005,102 and $560,236 respectively. The PIMs and PIMIs
have maturities ranging from 2002 to 2034. At June 30, 1999, the Trust's six
participating insured mortgage loans were not delinquent of principal and
interest payments. Management believes that the impairment provision of
$2,114,346 is adequate based on its analysis of property operations underlying
the Additional Loans.
Continued
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At June 30, 1999, the Trust's MBS portfolio has an amortized cost of $18,760,034
and unrealized gains and losses of $608,216 and $18,837, respectively. The MBS
portfolio has maturities ranging from 2008 to 2035. At June 30, 1999, the
Trust's insured mortgage loan was not delinquent of principal and interest
payments.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for six months ended
June 30, 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 - 4,434,685 - 4,434,685
Dividends (5,349,861) (4,434,685) - (9,784,546)
Decrease in unrealized
gain on MBS - - (283,397) (283,397)
Balance at June 30, 1999 $ 159,392,153 $ - $ 589,379 $ 159,981,532
5. Related Party Transactions
During the three months ended June 30, 1999 Additional Loan interest income from
an affiliate of the Advisor of $57,740 was received. During the six months ended
June 30, 1999 and 1998, Additional Loan interest income from an affiliate of the
Advisor of $144,348 and $86,609, respectively, was received. In addition, the
Trust received $75,020 of participation from an affiliate of the Advisor during
the second quarter and first half of 1999 and received $26,749 of participation
interest during the six months ended June 30, 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, began a
computer systems project in 1997 to significantly upgrade its existing hardware
and software. The Advisor completed the testing and conversion of the financial
accounting operating systems in February 1998. As a result, the Advisor has
generated operating efficiencies and believes its financial accounting operating
systems are Year 2000 ready. The Advisor incurred hardware costs as well as
consulting and other expenses related to the infrastructure and facilities
enhancements necessary to complete the upgrade and prepare for the Year 200.
There are no other significant internal systems or software that the Trust is
using at the present time.
The Advisor of the Trust surveyed the Trust's material third-party service
providers (including but not limited to its banks and telecommunications
providers) and significant vendors and received assurances that such service
providers and vendors are Year 2000 ready. The Trust does not anticipate any
problems with such providers and vendors that would materially impact its
results of operations, liquidity or capital resources. Nevertheless the Advisor
is developing contingency plans for all of its "mission-critical functions" to
insure business continuity.
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. However, the Trust
does not anticipate these would materially impact its results of operations,
liquidity or capital resources.
To date, the Trust has not incurred any cost associated with being Year 2000
ready. All costs have been incurred by the Advisor and it is estimated that any
future Year 2000 readiness costs will be borne by the Advisor.
Liquidity and Capital Resources
At June 30, 1999 the Trust has significant liquidity consisting of cash and cash
equivalents, of approximately $7.5 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 for the forseeable future.
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 remainder of the year. 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 on the MBS and insured
mortgages, 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 principal and 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 second
quarter of 1999 the operations of these properties have remained stable. The
Advisor expects the Audubon Villas PIMI to prepay during the third quarter of
1999 and anticipates the Trust will receive a substantial amount of
participation income. The Seasons PIMI continues to perform well and is
generating sufficient cash flow from property operations to make the Additional
Loan interest payments. The property underlying the Red Run PIMI is generating
cash flow from operations to fund a portion of its Additional Loan interest
payments and has sufficient escrows to make up any shortfalls during 1999.
In June 1999 the Trust entered into a second modification agreement with the
borrowers of the Mountain View Apartments PIMI reducing interest paid monthly on
the insured mortgage by 1.25% per annum from January 1, 1999 through December
31, 2004 and changing the participation features. Under the Agreement the Trust
will receive 75% of the first $130,667 of the surplus cash and 50% of any
remaining surplus cash on an annual basis to pay the Additional Loan interest
except that $288,580 of existing accruals related to the Additional Loan have
been forgiven. Unpaid Additional Loan interest shall accrue and be payable if
there are sufficient proceeds from a sale or refinancing of the property. In
addition, the borrower will pay down $153,600 of the Additional Loan and fund a
$54,000 reserve for property improvements.
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 MBS and insured mortgages are guaranteed or insured
by Fannie Mae, 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.
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, 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 $7.4 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 decreased $7.5 million and $8.1 million for the three and six months
ended June 30, 1999 as compared to the corresponding periods in 1998. Basic
interest on PIMs and PIMIs decreased $667,000 and $1,378,000 during the three
and six months ended June 30, 1999 and 1998, respectively, due to the Park
Highland and Coconut Club PIMI prepayments. Additional Loan interest and
Participation income were higher in 1998 versus 1999 due to the recognition of
previously deferred income on the Park Highland and Coconut Palm Additional
Loans and the participation interest received from these prepayments. Interest
income on MBS decreased $108,000 and $218,000 during the three and six months
ended June 30, 1999 due to the on-going principal collections reducing the
Trust's MBS investments.
Asset management fees declined $69,000 and $151,000 during the second quarter
and first half of 1999 as compared to the corresponding periods in 1998 due
primarily to the prepayments of the Park Highland and Coconut Club PIMIs.
Amortization expense was higher in the second quarter and first half of 1998 as
compared to 1999 due primarily to fully amortizing the prepaid fees and expenses
associated with the Park Highland PIMI in June of 1998.
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
(a) Exhibits
(10-1) Second modification agreement between
Krupp Government Income
Trust, Berkshire Mortgage Finance Corporation,
and Mountain View Ltd.
(b) 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: August 6, 1999