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 THEx
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 04-3073045
(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
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 II
BALANCE SHEETS
ASSETS
September 30, December 31,
1996 1995
Participating Insured Mortgages Investments ("PIMIs")
Insured mortgages(Note 2) $150,789,589 $150,448,995
Additional loans 29,952,351 29,952,351
Participating Insured Mortgages ("PIMs")(Note 2) 49,501,970 45,436,663
Mortgage-Backed Securities and multi family
insured mortgage loan("MBS")(Note 3) 41,444,945 48,851,858
Total mortgage investments 271,688,855 274,689,867
Cash and cash equivalents (Note 2) 9,224,905 11,675,494
Prepaid acquisition fees and expenses,
net of accumulated amortization of $4,113,753
and $2,922,496 12,369,889 13,561,146
Prepaid participation servicing fees,
net of accumulated amortization of $1,123,719
and $761,220 4,370,828 4,733,327
Interest receivable and other assets 2,054,377 2,305,349
Total assets $299,708,854 $306,965,183
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 1,608,977 $ 1,026,622
Other liabilities 19,370 20,576
Total liabilities 1,628,347 1,047,198
Commitments (Note 2)
Shareholders' equity: (Note 4)
Common Stock, no par value; 25,000,000 shares
authorized and 18,371,477 shares outstanding 298,653,573 304,530,460
Unrealized gain (loss) on MBS (573,066) 1,387,525
Total Shareholders' equity 298,080,507 305,917,985
Total liabilities and Shareholders'
equity $299,708,854 $306,965,183
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Revenues:
Interest income - PIMs and PIMIs:
Base interest $3,465,244 $3,274,486 $10,443,989 $ 8,981,874
Additional loan interest 380,495 384,072 1,141,485 1,093,102
Participation interest 212,316 145,072 692,298 422,195
Interest income - MBS 764,253 914,905 2,379,465 3,750,661
Interest income - other 113,122 387,804 396,663 951,169
Total revenues 4,935,430 5,106,339 15,053,900 15,199,001
Expenses:
Asset management fee to
an affiliate 515,109 532,365 1,545,307 1,592,690
Expense reimbursements to
affiliates 122,480 127,395 341,394 382,183
Amortization of prepaid expenses,
fees and organization costs 528,565 520,426 1,561,256 1,397,324
General and administrative 63,099 100,199 259,529 319,634
Loss on sale of MBS - - - 1,379,074
Total expenses 1,229,253 1,280,385 3,707,486 5,070,905
Net income $3,706,177 $3,825,954 $11,346,414 $10,128,096
Earnings per share $ .20 $ .21 $ .62 $ .55
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,
1996 1995
Operating activities:
Net income $11,346,414 $10,128,096
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of MBS - 1,379,074
Premium amortization 135,898 183,633
Amortization of prepaid expenses and fees
and organization costs 1,561,256 1,397,324
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 243,472 630,493
Increase (decrease) in other liabilities (1,206) 20,921
Net cash provided by operating
activities 13,285,834 13,739,541
Investing activities:
Investment in PIMs and Insured Mortgages (5,615,879) (41,924,001)
Investment in Additional Loans - (6,600,000)
Investment in MBS (591,600) -
Proceeds from the sale of MBS - 39,885,582
Principal collections on MBS 5,902,024 6,744,553
Principal collections on PIMs 1,209,978 934,436
Increase in deferred income on Additional
Loans 582,355 523,331
Net cash provided by (used for)
investing activities 1,486,878 (436,099)
Financing activity:
Dividends (17,223,301) (17,223,303)
Net decrease in cash and cash equivalents (2,450,589) (3,919,861)
Cash and cash equivalents, beginning of period 11,675,494 19,649,192
Cash and cash equivalents, end of period $ 9,224,905 $15,729,331
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"), 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, 1995 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 only normal recurring accruals) necessary to fairly
present the Trust's financial position as of September 30, 1996, its
results of operations for the three and nine months ended September
30, 1996 and 1995, and its cash flows for the nine months ended
September 30, 1996 and 1995.
The results of operations for the three and nine months ended
September 30, 1996 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, 1996, the Partnership has a remaining commitment of
approximately $1.2 million on The Fountains Apartments PIM ( The
Fountains ). The Trust has sufficient cash reserves to fund this
remaining commitment. During the nine months ended September 30,
1996, the Trust funded the remaining commitments on the Norumbega
Point insured mortgage and the Mill Ponds II Apartments PIM of
$1,303,435 and $810,814, respectively, and funded $3,501,630 of its
commitment on The Fountains.
At September 30, 1996, the Partnership s PIMs and PIMIs have a fair
value of $218,590,000 and gross unrealized losses of approximately
$11,654,000. The PIMs and PIMIs have maturities ranging from 2008 to
2036.
3. MBS
At September 30, 1996, the Trust's MBS portfolio has an amortized
cost of $42,018,011 and gross unrealized gains and losses of
approximately $202,607 and $775,673. The MBS portfolio has
maturities ranging from 2008 to 2023.
During May 1996, the Trust invested in a $591,600 face value Federal
Housing Administration - insured first mortgage loan having an
interest rate of 8.125% and maturing in 2031. The borrower may not
prepay the first
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS, Continued
mortgage loan for a period of five years and thereafter may prepay
the first mortgage loan subject to a 5% prepayment penalty that
declines 1% annually during the following five years. There is no
prepayment penalty after the tenth year.
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for the nine months ended
September 30, 1996 is as follows:
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain (Loss) Equity
Balance at December 31,
1995 $304,530,460 $ - $ 1,387,525 $305,917,985
Net income - 11,346,414 - 11,346,414
Dividends (5,876,887) (11,346,414) - (17,223,301)
Change in unrealized
gain on MBS - - (1,960,591) (1,960,591)
Balance at
September 30, 1996 $298,653,573 $ - $ (573,066) $298,080,507
5. Related Party Transactions
During the three and nine months ended September 30, 1996, the
Trust earned $147,761 and $295,522, respectively, of interest
payments on Additional Loans with an affiliate of the Advisor,
as compared to $147,761 and $295,522, respectively, during the
three and nine months ended September 30, 1995.
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.
Liquidity and Capital Resources
The most significant demand on the Trust's liquidity are quarterly
dividends paid to investors of approximately $5.7 million. Funds used for
dividends come from interest received on the PIMs, PIMIs, MBS, cash and
cash equivalents net of operating expenses, and certain principal
collections received on the PIMs and MBS. The Trust funds a portion of the
dividends from principal collections, as a result, the capital resources of
the Trust will continually decrease. As the capital resources decrease,
the total cash inflows to the Trust will also decrease which will result in
periodic adjustments to the quarterly dividends paid to investors.
In addition to funding its quarterly dividends paid to investors the
Trust has a remaining commitment of approximately $1.2 million on a PIM in
the construction phase. The Trust has sufficient cash reserves to fund
this commitment.
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 of cash available for
distribution. To the extent quarterly dividends do not fully utilize the
cash available for distribution and cash balances increase, the Advisor may
reinvest the available proceeds, adjust the dividend rate or distribute
such funds through a special distribution.
For the first five years of the PIMs and PIMIs the borrowers are
prohibited from prepaying. For the second five years, the borrowers can
prepay the loans incurring a prepayment penalty for PIMs or paying all
amounts due under the PIMIs and satisfying the required preferred return.
The Trust has the option of calling certain PIMs and all the PIMIs by
accelerating their maturity if the loans are not prepaid 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.
(In thousands, except per Share amounts)
Nine Months Ended Inception through
September 30, 1996 September 30, 1996
Distributable Cash Flow (a):
Net income $11,346 $ 63,752
Items providing or not requiring
the use of operating funds:
Loss on sale of MBS - 1,379
Amortization of prepaid fees and
expenses and organization costs 1,561 5,287
Additional loan interest received and
deferred 582 1,609
Distributable Cash Flow ("DCF") $13,489 $ 72,027
DCF per Share based on Shares
outstanding at September 30, 1996 $ .73 $ 3.92 (c)
Dividends:
Total dividends to Shareholders $17,223 (b) $112,644 (b)
Average dividend per Share based
on Shares outstanding at
September 30, 1996 $ .94 $ 6.13 (c)
(a) Distributable Cash Flow consists of income before
amortization of prepaid fees and expenses and organization
costs and before the effect of any gains or losses from the
sale of assets and includes interest collections on
Additional Loans.
(b) Includes an estimate of the November 1996 distribution.
(c) Shareholders average per Share return of capital as of
November 1996 is $2.21 [$6.13 - $3.92]. 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 and PIMs.
Assessment of Credit Risk
The Trust's investments in mortgages, with the exception of the Additional
Loans, 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 the
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. However, obligations of FNMA
are not backed by the U.S. Government. FNMA 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
FNMA 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. 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
conventional real estate lending, including: reliance on the owner's
operating skills and ability to maintain occupancy levels, control
operating expenses, maintain 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.
Operations
The following discussion relates to the operations of the Trust during the
three and nine months ended September 30, 1996 and 1995. (Amounts are
stated in thousands, except per Share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
Interest income on PIMs
and PIMIs:
Base interest $3,465 $ .19 $3,275 $ .18 $ 10,444 $ .57 $ 8,982 $ .49
Additional loan
interest 684 .04 639 .03 1,723 .09 1,616 .09
Participation interest 212 .01 145 .01 692 .04 422 .02
Interest income on MBS 764 .04 915 .05 2,379 .13 3,751 .20
Other interest income 113 .01 388 .02 397 .02 951 .05
Trust expenses (700) (.04) (761) (.04) (2,146) (.12) (2,295) (.12)
DCF 4,538 .25 4,601 .25 13,489 .73 13,427 .73
Reconciliation to
net income:
Loss on sale of MBS - - - - - - (1,379) (.08)
Additional loan
interest deferred (304) (.02) (255) (.01) (582) (.03) (523) (.02)
Amortization of prepaid
fees and expenses and
organization costs (528) (.03) (520) (.03) (1,561) (.08) (1,397) (.08)
Net income $3,706 $ .20 $3,826 $ .21 $11,346 $.62 $10,128 $ .55
Weighted average
Shares 18,371,477 18,371,477
The Trust s net income decreased $120,000 during the third quarter of 1996
as compared to the third quarter of 1995 due primarily to a $275,000
decrease in other interest income and a $151,000 decrease in interest
income on MBS. The decline in other interest income resulted from lower
cash balances available for short-term investment in 1996 versus 1995.
Interest income on MBS decreased and will continue to decline as principal
collections reduce the outstanding principal balance of the MBS portfolio.
Base interest income on PIMs and PIMIs increased $190,000 during the three
months ended September 30, 1996 as compared to the corresponding period in
1995 due primarily to the investments in PIMs and insured mortgages made in
the fourth quarter of 1995 and during 1996. The Trust also experienced a
$67,000 increase in participation interest income in the third quarter of
1996 as compared to the third quarter of 1995. Trust expenses decreased
$61,000 during the three months ended September 30, 1996 versus the
corresponding period in 1995 due primarily to lower general and
administrative expenses and a decrease in asset management fees. Asset
management fees will continue to decline as principal collections reduce
the outstanding principal balance of the Trust s investments in mortgages.
The Trust s net income increased $1,218,000 for the nine months ended
September 30, 1996 as compared to the corresponding period in 1995, due
primarily to the recognition of a $1,379,000 loss on the sale of MBS in
1995. Base interest on PIMs and PIMIs increased approximately $1,462,000
during the nine months of 1996 as compared to the same period of 1995 as a
result of investments in PIMs and insured mortgages made in 1995 of
approximately $46 million with interest rates ranging from 6.875% to 7.875%
per annum. The Trust also experienced a $270,000 increase in participation
interest income during the nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995. Interest income on MBS
decreased $1,372,000 during the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995 due primarily to the
sale of approximately $40 million of MBS in April 1995. Other interest
income declined approximately $554,000 during the nine months of 1996
versus the same period of 1995 as a result of lower cash balances available
for short-term investment. Amortization expense increased as the Trust
began amortizing prepaid fees and expenses on newly acquired PIMs and
PIMIs. However, the higher amortization expense was partially offset by
lower expense reimbursements to affiliates and general and administrative
expenses.
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: October 28, 1996