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 September 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
September 30, December 31,
1999 1998
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
Insured Mortgages $ 60,219,084 $ 75,386,460
Additional loans, net of impairment provision of $2,114,346 8,399,262 11,243,862
Participating Insured Mortgages ("PIMs")
(Note 2) 47,436,190 47,737,583
Mortgage-Backed Securities and insured
mortgage ("MBS") (Note 3) 18,335,257 22,132,858
Total mortgage investments 134,389,793 156,500,763
Cash and cash equivalents 6,603,696 9,004,397
Interest receivable and other assets 868,179 1,057,365
Prepaid acquisition fees and expenses, net
of accumulated amortization of $ 7,139,099
and $ 6,125,191, respectively 2,431,697 3,445,605
Prepaid participation servicing fees, net of
accumulated amortization of $ 2,148,066 and
$ 1,776,625, respectively 1,042,118 1,413,559
Total assets $ 145,335,483 $ 171,421,689
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans
(Notes 2 and 5) $ 4,025,450 $ 5,773,669
Other liabilities 74,750 33,230
Total liabilities 4,100,200 5,806,899
Shareholders' equity (Note 4):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 140,731,258 164,742,014
Accumulated comprehensive income 504,025 872,776
Total Shareholders' equity 141,235,283 165,614,790
Total liabilities and Shareholders'
equity $ 145,335,483 $ 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 For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Revenues:
Interest income - PIMs
and PIMIs:
Basic interest $ 2,127,439 $ 2,400,678 $ 6,761,546 $ 8,412,360
Additional loan interest 2,128,724 196,970 2,316,389 3,059,286
Participation income 2,193,485 151,417 2,268,505 5,049,492
Interest income - MBS 371,727 466,103 1,172,022 1,484,351
Other interest income 178,998 557,286 384,162 942,923
Total revenues 7,000,373 3,772,454 12,902,624 18,948,412
Expenses:
Asset management fee
to an affiliate 267,621 301,642 847,908 1,032,439
Expense reimbursements
to affiliates 67,479 69,522 153,173 137,643
Amortization of prepaid
fees and expenses 793,618 1,064,119 1,385,349 2,702,839
General and administrative 71,201 112,730 281,055 336,779
Total expenses 1,199,919 1,548,013 2,667,485 4,209,700
Net income 5,800,454 2,224,441 10,235,139 14,738,712
Other comprehensive income:
Net change in unrealized
gain on MBS (85,354) 171,259 (368,751) 106,974
Total comprehensive income $ 5,715,100 $ 2,395,700 $ 9,866,388 $ 14,845,686
Earning per Share $ .39 $ .15 $ .68 $ .98
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 Nine Months
Ended September 30,
1999 1998
Operating activities:
Net income $ 10,235,139 $ 14,738,712
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of net premium 2,933 -
Amortization of prepaid fees and expenses 1,385,349 2,702,839
Changes in assets and liabilities:
Decrease in interest receivable and other
assets 189,186 247,162
Increase (decrease) in other liabilities 41,520 (444)
Net cash provided by operating activities 11,854,127 17,688,269
Investing activities:
Principal collections on MBS 3,425,917 3,550,629
Principal collections on PIMs 606,812 656,518
PIM prepayment 14,861,957 32,603,506
Collections on Additional Loans 2,844,600 5,850,900
Decrease in deferred income on Additional Loans (1,748,219) (2,183,260)
Net cash provided by investing activities 19,991,067 40,478,293
Financing activity:
Dividends (34,245,895) (57,698,688)
Net (decrease) increase in cash and cash equivalents (2,400,701) 467,874
Cash and cash equivalents, beginning of period 9,004,397 9,749,804
Cash and cash equivalents, end of period $ 6,603,696 $ 10,217,678
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, 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
September 30, 1999, its results of operations for the three and nine months
ended September 30, 1999 and 1998, and its cash flows for the nine months ended
September 30, 1999 and 1998.
The results of operations for the three and nine months ended September 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
feature. 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 had been forgiven. In addition, the
borrower repaid $153,600 of the Additional Loan and funded approximately $54,000
to a reserve for property improvements.
During the third quarter, the Trust received a prepayment of the Audubon
Villas PIMI including the first mortgage with a remaining principal balance of
$14,861,957, the Additional Loan of $2,691,000 and participation income of
$1,966,901. Also, $1,962,261 was recognized as Additional Loan interest income
which was previously recorded as deferred income. On August 18, 1999, the
Advisor declared a special dividend of $1.30 per share that was paid on
September 17, 1999 from the payoff of the mortgage on Audubon Villas PIMI.
At September 30, 1999, the Trust's PIMs and PIMIs had a fair value of
$116,428,374 and gross unrealized gains and losses of $1,432,635 and $1,058,797
respectively. The PIMs and PIMIs have maturities ranging from 2002 to 2034. At
September 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 September 30, 1999, the Trust's MBS portfolio had an amortized cost of
approximately $17,831,232 and unrealized gains and losses of $518,075 and
$14,050, respectively. The MBS portfolio has maturities ranging from 2008 to
2029. At September 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 the nine months ended
September 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 - 10,235,139 - 10,235,139
Dividends (24,010,756) (10,235,139) - (34,245,895)
Decrease in unrealized
gain on MBS - - (368,751) (368,751)
Balance at September 30, 1999 $ 140,731,258 $ - $ 504,025 $ 141,235,283
5. Related Party Transactions
During the three and nine months ended September 30, 1999, Additional Loan
interest income of $48,523 and $225,156, respectively, was received from
affiliates of the Advisor. During the three and nine months ended September 30,
1998, Additional Loan interest income of $45,623 and $218,841, respectively, was
received from affiliates of the Advisor.
During the three and nine months ended September 30, 1999, participation
interest income of $78,479 and $153,499, respectively, was received from
affiliates of the Advisor. During the three and nine months ended September 30,
1998, participation interest income of $66,707 and $93,457, respectively, was
received from affiliates of the Advisor.
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.
Impact of the Year 2000 Issue
The Advisor 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 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 2000.
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 incurred $17,527 of costs associated with being Year
2000 ready. The Trust does not expect to incur any additional Year 2000
readiness costs.
Liquidity and Capital Resources
At September 30, 1999 the Trust had significant liquidity consisting of
cash and cash equivalents, of approximately $6.6 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 $4.9 million. 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 periodically reviews the dividend rate to determine whether an
adjustment is necessary based on projected future cash flows. Based on current
projections, the Advisor believes the Trust will need to adjust the dividend
rate with the dividend payment to be made in February 2000. The Board of
Trustees will determine the new rate at their quarterly meeting in November. 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
third quarter of 1999 the operations of these properties have remained stable.
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 in interest payments 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, funds held in escrow by GIT were used to pay down the
Additional Loan by $153,600 and funded a $54,000 reserve for property
improvements.
During the third quarter the Trust received a prepayment of the Audubon
Villas PIMI and paid a special distribution of $1.30 per share from the proceeds
of the payoff.
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 FannieMae, 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.
FannieMae 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 $6.3 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.
Results of Operations
The Trust's net income decreased by $4.5 million during the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
due primarily to decreases in interest income net of decreases in asset
management fees to an affiliate and amortization expense. Additional Loan
interest income declined in 1999 due to the Park Highland and Coconut Palm PIMI
payments in 1998. Participation income was higher in 1998 as compared to 1999
due primarily to the receipt of participation income from the Park Highland and
Coconut Palm PIMIs in 1998 which was greater than the participation income
received from the Audubon Villas PIMI in 1999. Basic interest on PIMs and PIMIs
decreased during the nine months ended September 30, 1999 compared to 1998 due
primarily to the Park Highland and Coconut Palm PIMI prepayments in 1998 and the
Audubon Villas PIMI prepayment in 1999. Interest income on MBS decreased during
the nine months ended September 30, 1999 as compared to 1998 due to principal
collections reducing the MBS investment balance. Other interest income decreased
due to lower average cash balances while asset management fees to an affiliate
and amortization of prepaid fees and expenses decreased due to the PIMI payoffs
mentioned above.
Net income increased by $3.6 million during the three months ended
September 30, 1999 as compared to the corresponding period in 1998 due primarily
to participation income received from the Audubon Villas PIMI prepayment, the
reclassification of deferred income related to the Audubon Villas PIMI to
Additional Loan interest upon prepayment of the PIMI and amortization expense
decreased which was a result of the payoffs of the Park Highland and Coconut
Palm PIMIs in 1998.
The Trust 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. 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: October 29, 1999