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 0-20164
Krupp Government Income Trust II
Massachusetts 04-3073045
(State or other jurisdiction of (IRS employer identification no.)
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
September 30, December 31,
1999 1998
Participating Insured Mortgage Investments
("PIMIs")(Note 2):
Insured mortgages $ 132,106,140 $ 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) 38,081,008 38,331,257
Mortgage-Backed Securities and multi-family
insured mortgage loan ("MBS")(Note 3) 33,877,390 41,834,199
Total mortgage investments 227,362,889 236,596,132
Cash and cash equivalents 21,221,328 18,010,578
Prepaid acquisition fees and expenses, net of
accumulated amortization of $ 8,281,546 and
$ 7,167,563 respectively 7,175,566 8,289,549
Prepaid participation servicing fees, net of
accumulated amortization of $ 2,678,515 and
$ 2,321,513 respectively 2,473,855 2,830,857
Interest receivable and other assets 1,335,994 1,682,882
Total assets $ 259,569,632 $ 267,409,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 2,585,039 $ 2,719,343
Other liabilities 81,761 43,563
Total liabilities 2,666,800 2,762,906
Shareholders' equity (Note 4):
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 257,056,354 264,099,856
Accumulated comprehensive (loss) income (153,522) 547,236
Total Shareholders' equity 256,902,832 264,647,092
Total liabilities and Shareholders' equity $ 259,569,632 $ 267,409,998
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,
1999 1998 1999 1998
Revenues:
Interest income - PIMs and
PIMIs:
Basic interest $ 2,995,857 $ 3,088,808 $ 9,009,739 $ 9,432,180
Additional loan interest 392,683 562,037 1,367,277 1,447,787
Participation income 250,834 2,274,849 505,316 3,107,762
Interest income - MBS 585,222 762,244 1,838,554 2,541,786
Interest income - other 260,192 367,228 726,678 793,981
Total revenues 4,484,788 7,055,166 13,447,564 17,323,496
Expenses:
Asset management fee to an
affiliate 436,460 465,670 1,308,359 1,436,274
Expense reimbursements to
affiliates 79,161 77,358 197,745 150,198
Amortization of prepaid
expenses and fees 490,329 1,364,484 1,470,985 2,415,821
General and administrative 80,975 118,793 290,681 339,870
Total expenses 1,086,925 2,026,305 3,267,770 4,342,163
Net income 3,397,863 5,028,861 10,179,794 12,981,333
Other comprehensive income:
Net change in unrealized gain
on MBS (136,479) 776,376 (700,758) 783,231
Total comprehensive income $ 3,261,384 $ 5,805,237 $ 9,479,036 $ 13,764,564
Earnings per share $ .18 $ .27 $ .55 $ .70
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,
1999 1998
Operating activities:
Net income $ 10,179,794 $ 12,981,333
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium amortization 151,675 136,519
Amortization of prepaid fees and expenses 1,470,985 2,415,821
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 346,888 661,435
Increase in other liabilities 38,198 2,871
Net cash provided by operating activities 12,187,540 16,197,979
Investing activities:
Investment in PIMs and Insured Mortgages - (1,003,677)
Prepayment of Additional Loan - 2,860,000
Principal collections on MBS 7,104,376 6,469,904
Principal collections on PIMS and Insured mortgages 1,276,434 12,313,203
Decrease in deferred income on Additional Loans (134,304) (151,894)
Net cash provided by investing activities 8,246,506 20,487,536
Financing activity:
Dividends (17,223,296) (33,206,483)
Net increase in cash and cash equivalents 3,210,750 3,479,032
Cash and cash equivalents, beginning of period 18,010,578 13,520,091
Cash and cash equivalents, end of period $ 21,221,328 $ 16,999,123
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, 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
September 30, 1999, the results of its 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
At September 30, 1999, the Trust's PIMs and PIMIs had a fair value of
$190,164,472 and gross unrealized gains and losses of $445,831, and $3,766,858
respectively. The PIMs and PIMIs have maturities ranging from 2008 to 2036. At
September 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 September 30, 1999
their respective borrowers were 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 September 30, 1999, the Trust's MBS portfolio had an amortized cost of
approximately $34,030,912 and gross unrealized gains and losses of approximately
$139,367 and $292,889, respectively. The MBS portfolio has maturities ranging
from 2008 to 2031. At September 30, 1999, the Trust's insured mortgage loan was
not delinquent of principal and interest.
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 nine months ended
September 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 - 10,179,794 - 10,179,794
Dividends (7,043,502) (10,179,794) - (17,223,296)
Change in
unrealized gain
on MBS - - (700,758) (700,758)
Balance at
September 30, 1999 $ 257,056,354 $ - $ (153,522) $ 256,902,832
5. Related Party Transactions
During the three and nine months ended September 30, 1999, and 1998, both years
had Additional Loan interest income of $221,641 and $443,282, respectively,
received from an affiliate of the Advisor.
During the three and nine months ended September 30, 1999, participation
interest income of $200,834 and $392,816, respectively, was received from an
affiliate of the Advisor. During the three and nine months ended September 30,
1998, participation interest income of $170,652 and $239,107 was received from
an affiliate of the Advisor.
6. Subsequent Event
The Estates
The Trust received a payoff from The Estates MBS on October 18, 1999 for
$11,375,380. The Trust did not receive any participation income but did receive
a prepayment premium of $1,023,784. The Trust will pay a special distribution of
$.68 per Unit from the payoff proceeds in October.
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.
Impact of the Year 2000 Issue
The Advisor conducted an assessment of the Trust's core internal and
external computer information systems and has taken the necessary steps to
further 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 incurred $20,265 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 $21.2 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 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 should pay a special dividend and
then adjust the dividend rate effective with the dividend to be made in February
2000. The Board of Trustees will evaluate this matter 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.
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 participation income to the Trust. However, the operating
performance of Windmill Lakes and Oasis at Springtree in South Florida have
continued to be adversely affected by the highly competitive housing market, 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.
The Trust received a payoff of $12,399,164 from the Estates MBS consisting
of a first mortgage of $11,375,380 and a prepayment premium of $1,023,784 on
October 18, 1999. During October, 1999, the Partnership will pay a special
distribution of $.68 per unit from the proceeds received from the Estates MBS
payoff.
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 MBS and insured mortgages are guaranteed or
insured by The 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 $21 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 following discussion relates to the operations of the Trust during the
three and nine months ended September 30, 1999 and 1998.
The Trust's net income decreased by $2.8 million during the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
due primarily to decreases in participation income, interest income on MBS, and
basic interest income on PIMs and PIMIs, net of a decrease in amortization
expense. Participation income was higher in 1998 as compared to 1999 due
primarily to the receipt of participation income of $1,964,000 upon payoff of
the St. Germain PIMI during the nine months ended September 30, 1998. 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 mentioned above. Amortization expense decreased in 1999
versus 1998 due to fully amortizing the prepaid fees and expenses associated
with the St. Germain PIMI in 1998.
Net income decreased by $1.7 million during the three months ended
September 30, 1999 as compared to the corresponding period in 1998 due primarily
to lower participation income, Additional Loan interest income, and interest
income on MBS net of a decrease in amortization expense. The reason for the
changes in participation income, interest income on MBS and amortization expense
are the same as discussed in the previous paragraph. The decrease in Additional
Loan interest income during the three months ended September 30, 1999, compared
to 1998, is due to no receipt of income from Oasis and the prepayment of the St.
Germain PIMI.
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 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 29, 1999