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
x 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 0-20164
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
-1-
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
March 31, December 31,
1998 1997
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
Insured mortgages $145,175,884 $145,537,234
Additional loans 29,152,351 29,152,351
Participating Insured Mortgages ("PIMs")
(Note 2) 37,569,147 37,645,082
Mortgage-Backed Securities ("MBS")
(Note 3) 49,804,057 51,171,301
Total mortgage investments 261,701,439 263,505,968
Cash and cash equivalents 14,656,337 13,520,091
Prepaid acquisition fees and expenses, net of
accumulated amortization of $ 6,496,265 and
$6,099,180, respectively 9,987,377 10,384,462
Prepaid participation servicing fees, net of
accumulated amortization of $ 1,987,080 and
$1,858,497, respectively 3,507,467 3,636,050
Interest receivable and other assets 1,644,290 2,111,153
Total assets $291,496,910 $293,157,724
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 2,586,142 $ 2,755,705
Other liabilities 33,822 30,949
Total liabilities 2,619,964 2,786,654
Commitments (Note 2)
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 288,410,028 289,864,327
Unrealized gain on MBS 466,918 506,743
Total Shareholders' equity 288,876,946 290,371,070
Total liabilities and Shareholders' equity $291,496,910 $293,157,724
The accompanying notes are an integral
part of the financial statements.
-3-
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME
For the Three Months
Ended March 31,
1998 1997
Revenue:
Interest income - PIMs and PIMIs:
Base interest $3,136,987 $3,354,091
Additional loan interest 511,987 611,468
Participation interest 694,354 491,525
Interest income - MBS 958,292 729,182
Interest income - other 188,905 120,712
Total revenue 5,490,525 5,306,978
Expenses:
Asset management fee to an affiliate 484,951 504,443
Expense reimbursements to affiliates 108,483 120,910
Amortization of prepaid fees and expenses 525,668 534,747
General and administrative 84,622 134,262
Total expenses 1,203,724 1,294,362
Net income $4,286,801 $4,012,616
Earnings per Share $ .23 $ .22
Weighted average Shares outstanding 18,371,477 18,371,477
-4-
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
For The Three Months Ended
March 31,
1998 1997
Operating activities:
Net income $ 4,286,801 $4,012,616
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 27,370 23,329
Amortization of prepaid fees and expenses 525,668 534,747
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 466,863 620,507
Increase (decrease) in other liabilities 2,873 (20,798)
Net cash provided by operating activities 5,309,575 5,170,401
Investing activities:
Principal collections on MBS 1,300,049 1,217,480
Principal collections on PIMs 437,285 429,608
Increase (decrease) in deferred income
on Additional Loans (169,563) 74,492
Net cash provided by investing activities 1,567,771 1,721,580
Financing activity:
Dividends (5,741,100) (5,741,100)
Net increase in cash and cash equivalents 1,136,246 1,150,881
Cash and cash equivalents, beginning of period 13,520,091 9,214,592
Cash and cash equivalents, end of period $14,656,337 $10,365,473
-6-
The accompanying notes are an integral
part of the financial statements.
-7-
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
1.Accounting PoliciesCertain 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 AAdvisor@ 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, 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 primarily of 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 has a commitment to fund approximately
$1,006,000 on a closed PIM. This commitment will be funded by cash on
hand and future principal collections from the MBS, PIMs and PIMIs.
At March 31, 1998, the Trust=s PIMs and PIMIs have a fair value of
approximately $208,265,705 and gross unrealized losses of approximately
$3,631,677. The PIMs and PIMIs have maturities ranging from 2008 to
2036. At March 31, 1998 there are no insured mortgage loans within the
Trusts portfolio that are delinquent of principal or interest.
Windmill Lakes has been adversely affected by a competitive housing
market in its South Florida area. As a result, at March 31, 1998 the
borrower of the Windmill Lakes Additional Loan is in technical default on
its Additional Loan for not making the full required base interest
payments due on the Additional Loan. The Advisor is currently assessing
the feasibility of extending debt service relief to the borrower until
the market stabilizes.
3. MBS
At March 31, 1998, the Trust's MBS portfolio has an amortized cost of
approximately $49,337,139 and gross unrealized gains and losses of
approximately $515,378 and $48,460. The MBS portfolio has maturities
ranging from 2008 to 2023.
-8-
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Shareholder's Equity
A summary of changes in Shareholders' equity for the three months ended
March 31, 1998 is as follows:
Total
Common Retained Unrealized Shareholders'
Stock Earnings Gain(Loss) Equity
Balance at December 31,
1997 $289,864,327 $ - $ 506,743 $290,371,070
Net income - 4,286,801 - 4,286,801
Dividends (1,454,299) (4,286,801) - (5,741,100)
Decrease in unrealized
gain on MBS - - (39,825) (39,825)
Balance at March 31, 1998 $288,410,028 $ - $ 466,918 $288,876,946
5. Related Party Transactions
During the three months ended March 31, 1998 and 1997, the Trust
received $221,641 and $198,261, respectively, of interest on an
Additional Loan with an affiliate of the Advisor. In addition, the
Trust received $68,456 and $0, respectively, related to participation
interest income for the three months ended March 31, 1998 and 1997.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Managements 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
At March 31, 1998 the Trust has significant liquidity consisting of cash and
cash equivalents, of approximately $14.7 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 $5.7 million. Funds for dividends come
from interest income received on PIMs, PIMIs, MBS and 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 reinvest the available proceeds, adjust the dividend rate or
distribute such funds through a special distribution.
The borrower on the St. Germain PIMI is pursuing a refinance of the property
while financing options are favorable. The borrower has requested a waiver of
the prohibition preventing a repayment of the loan prior to the end of the
fifth loan year, which occurs in December 1998. This request is currently
under review by the Advisor. If the Advisor approves the request, the Trust
will receive its preferred return as well as its share in the increase in the
value of the property, which will be determined with an appraisal.
Most of the other properties in the Trust=s portfolio generate sufficient
operating revenues to adequately maintain the property, service the debt and
pay participating interest to the Trust. However, the operating performance
-10-
of Windmill Lakes in South Florida has continued to be adversely affected by
the highly competitive housing market in Pembroke Pines, and the borrower is
currently delinquent in his obligation on the Additional Loan. The borrower
has been trying to sell the property but has been unable to secure a purchase
offer that will cover the property=s outstanding liabilities. The Advisor is
currently assessing the feasibility of extending debt service relief to the
borrower until the market stabilizes.
In addition to funding its quarterly dividends paid to investors the Trust
has a remaining commitment of approximately $1.0 million on a PIM in the
construction phase. The Trust has sufficient cash reserves to fund this
commitment.
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.
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) and the United States 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. 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. However, obligations of FNMA are not backed by the U.S.
Government. 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
higher risk debt instruments,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.
-11-
The Trust includes in cash and cash equivalents approximately $13 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 ended months March 31, 1998 and 1997.
The Trust s net income increased slightly during the first quarter of 1998 as
compared to the first quarter of 1997 due to increases in participation
interest and other interest income of approximately $203,000 and $68,000,
respectively and a decline in expenses of approximately $91,000. This was
offset by a decrease additional loan interest of approximately $99,000. The
increase in participation income is due to the Trust recognizing the
settlement related to The Estates of $232,000 that was received in 1998 and
three of the PIMIs paying higher participation interest for the three months
ended March 31, 1998 as compared to the same period in 1997. This was offset
by lower participation interest from four other PIMIs for the three months
ended March 31, 1998 as compared to the same period in 1997. The decrease in
Additional Loan interest is due to the prepayment of the Willows Additional
Loan during the third quarter of 1997 and no Additional Loan payment from the
borrower of the Windmill Lakes PIMI. Other interest income also increased due
to the Trust having higher short-term investment balances during the first
quarter of 1988 when compared to the same period in 1997. The decrease in
expenses is primarily due to lower general and administrative expenses for
transfer agent costs of approximately $30,000 during the three months ended
March 31, 1998 as compared to the same period in 1997.
The decrease in base interest on PIMs and the increase in interest on MBS are
primarily due to two transactions in 1997 involving the Willows Apartment PIMI
and the Estates Apartment PIM. In each of these transactions the properties
were sold and the Participating and Additional Loans were paid off. However,
the buyer assumed the existing first mortgage and the Trust will continue to
receive principal and interest on the portion of the financing but has now
classified it as an MBS.
As principal collections reduce the Trust s investments in MBS, PIMs and
PIMIs, interest income on MBS and base interest income on PIMs and PIMIs will
decline. The Trust funds a portion of 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.
-12-
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: April 23, 1998
-14-