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 0-20164
Krupp Government Income Trust II
Massachusetts 04-3073045
(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 II
BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
Insured mortgages $ 132,454,926 $ 133,132,325
Additional loans, net of impairment provision of $2,994,000 23,298,351 23,298,351
Participating Insured Mortgages ("PIMs")(Note 2) 38,165,995 38,331,257
Mortgage-Backed Securities and multi-family
insured mortgage loan ("MBS")(Note 3) 35,717,274 41,834,199
Total mortgage investments 229,636,546 236,596,132
Cash and cash equivalents 20,722,659 18,010,578
Prepaid acquisition fees and expenses, net of
accumulated amortization of $7,910,218 and
$ 7,167,563 respectively 7,546,894 8,289,549
Prepaid participation servicing fees, net of
accumulated amortization of $2,559,514 and
$ 2,321,513 respectively 2,592,856 2,830,857
Interest receivable and other assets 1,801,722 1,682,882
Total assets $ 262,300,677 $ 267,409,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 2,737,012 $ 2,719,343
Other liabilities 181,119 43,563
Total liabilities 2,918,131 2,762,906
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 259,399,589 264,099,856
Accumulated comprehensive income (loss) (17,043) 547,236
Total Shareholders' equity 259,382,546 264,647,092
Total liabilities and Shareholders' equity $ 262,300,677 $ 267,409,998
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
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 $ 3,003,293 $ 3,206,385 $ 6,013,882 $ 6,343,372
Additional loan interest 446,566 373,763 974,594 885,750
Participation interest 254,482 138,559 254,482 832,913
Interest income - MBS 611,225 821,250 1,253,332 1,779,542
Interest income - other 236,990 237,848 466,486 426,753
Total revenues 4,552,556 4,777,805 8,962,776 10,268,330
Expenses:
Asset management fee to an
affiliate 435,676 485,653 871,899 970,604
Expense reimbursements to
affiliates 79,161 (35,643) 118,584 72,840
Amortization of prepaid
fees and expenses 490,328 525,669 980,656 1,051,337
General and administrative 146,501 136,455 209,706 221,077
Total expenses 1,151,666 1,112,134 2,180,845 2,315,858
Net income 3,400,890 3,665,671 6,781,931 7,952,472
Other comprehensive income:
Net change in unrealized gain
on MBS (528,174) 46,680 (564,279) 6,855
Total comprehensive income $ 2,872,716 $ 3,712,351 $ 6,217,652 $ 7,959,327
Earnings per share $ .19 $ .20 $ .37 $ .43
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 Six Months
Ended June 30,
1999 1998
Operating activities:
Net income $ 6,781,931 $ 7,952,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 110,680 80,747
Amortization of prepaid fees and expenses 980,656 1,051,337
Changes in assets and liabilities:
Decrease (increase) in interest receivable
and other assets (118,840) 175,924
Increase (decrease) in other liabilities 137,556 (6,879)
Net cash provided by operating activities 7,891,983 9,253,601
Investing activities:
Principal collections on MBS 5,441,966 3,910,316
Principal collections on PIMs 842,661 888,196
Investment in PIMs and Insured Mortgages - (1,003,677)
Increase (decrease) in deferred income on
Additional Loans 17,669 (214,331)
Net cash provided by investing activities 6,302,296 3,580,504
Financing activity:
Dividends (11,482,198) (11,482,200)
Net increase in cash and cash equivalents 2,712,081 1,351,905
Cash and cash equivalents, beginning of period 18,010,578 13,520,091
Cash and cash equivalents, end of period $ 20,722,659 $ 14,871,996
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.
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 June
30, 1999, the results of its 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
At June 30, 1999, the Trust's PIMs and PIMIs have a fair value of $194,024,770
and gross unrealized gains and losses of $621,697 and $516,199, respectively.
The PIMs and PIMIs have maturities ranging from 2008 to 2036. At June 30, 1999,
the Trust's six participating insured mortgage loans were not delinquent of
principal or interest.
Windmill Lakes and Oasis have been adversely affected by a competitive housing
market in the South Florida area. As a result, at June 30, 1999 their respective
borrowers are in technical default for not making the full required base
interest payments due on the Additional Loan. The Advisor is currently assessing
its options related to these loans.
Management believes that the impairment provision of $2,994,000 is adequate
based on its analysis of property operations underlying the Additional Loans.
3. MBS
At June 30, 1999, the Trust's MBS portfolio has an amortized cost of
approximately $35,734,317 and gross unrealized gains and losses of $228,599 and
$245,642, respectively. The MBS portfolio has maturities ranging from 2008 to
2031. At June 30, 1999, the Trust's insured mortgage loan was not delinquent of
principal or interest.
Continued
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 six months ended
June 30, 1999 is as follows:
Accumulated Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income (Loss) Equity
Balance at
December 31, 1998 $ 264,099,856 $ - $ 547,236 $ 264,647,092
Net income - 6,781,931 - 6,781,931
Dividends (4,700,267) (6,781,931) - (11,482,198)
Change in
unrealized gain
on MBS - - (564,279) (564,279)
Balance at $ 259,399,589 $ - $ (17,043) $ 259,382,546
June 30, 1999
5. Related Party Transactions
During the three months ended June 30, 1999, additional loan interest income
from an affiliate of the Advisor of $147,760 was received. During the six months
ended June 30, 1999 and 1998, additional loan interest income from an affiliate
of the Advisor of $369,401 and $221,641, respectively, was received. In
addition, the Trust received $191,982 of participation interest income during
the three months ended June 30, 1999 and $191,982 and $68,456 during the six
months ended June 30, 1999 and 1998, respectively from an affiliate 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 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 conducted an assessment of the Trust's core internal
and external computer information systems and has taken the 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 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 providers
and vendors are to be 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 $20.7 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 for the forseeable future.
The most significant demand on the Trust's liquidity is quarterly dividends paid
to investors of $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 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.
Most of the properties underlying the Trust's PIMs and PIMIs generate sufficient
operating revenues to adequately maintain the property, service the debt and pay
participating interest to the Trust. However, the operating performance of
Windmill Lakes and Oasis at Springtree in South Florida have continued to be
adversely affected by highly competitive housing markets, and the respective
borrowers are currently delinquent on their obligations on their Additional
Loans. The Advisor is currently assessing its options related to these loans.
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 Fannie
Mae, 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.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. However, obligations of Fannie Mae
are not backed by the U.S. Government. Fannie Mae 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 Fannie
Mae 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 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.
The Trust includes in cash and cash equivalents $19.2 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 Trust's net income decreased by $1.2 million during the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998 due primarily to
decreases in participation interest income, interest income on MBS and basic
interest income on PIMs and PIMIs. Participation interest income was higher in
1998 as compared to 1999 due primarily to the receipt of participation interest
from the St. Germain PIMI of $265,000 and The Estates PIM of $232,000 in the
first quarter of 1998. In addition, the Trust received participation income
totaling $336,000 from six PIMIs during the first half of 1998 as compared to
$254,000 from two PIMIs during the first half of 1999. Interest income on MBS
decreased during 1999 as compared to 1998 due to significant principal
collections reducing the MBS investment balance. Basic interest on PIMs and
PIMIs decreased in 1999 as compared to 1998 due primarily to the St. Germain
prepayment in the third quarter of 1998.
Net income decreased by $265,000 during the three months ended June 30, 1999 as
compared to the corresponding period in 1998 due primarily to lower basic
interest on PIMs and PIMIs, and interest income on MBS. Basic interest on PIMs
and PIMIs, and interest income on MBS decreased due to principal collections and
prepayments reducing the Trust's mortgage investments.
The Trust funds a portion of its distributions with principal collections which
reduces the invested assets generating income from the Trust. As invested assets
decline so will interest income on MBS, basic interest on PIM and PIMIs, and
other interest income.
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: August 6, 1999