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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3089272
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Beacon Street, Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 523-0066
Securities registered pursuant to Section 12(b) of the Act:
Title Name of Exchange On Which Registered
- ----------------------------- ------------------------------------
SHARES OF BENEFICIAL INTEREST NONE
Securities registered pursuant to Section 12(g) of the Act: None
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /.
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes / / No /X/
Aggregate market value of voting securities held by non-affiliates: Not
applicable.
Documents incorporated by reference: see Item 15
The exhibit index is located on pages 12-17
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PART I
This Form 10-K 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.
ITEM 1. BUSINESS
Krupp Government Income Trust (the "Trust") was formed on November 1, 1989 by
filing a Declaration of Trust in the Commonwealth of Massachusetts. The Trust is
authorized to sell and issue not more than 17,510,000 shares of beneficial
interest ("the Shares"). The Trust raised approximately $300 million through a
public offering of Shares of beneficial interest and used the proceeds available
for investment primarily to acquire participating insured mortgages ("PIMs"),
participating insured mortgage investments ("PIMIs") and mortgage-backed
securities ("MBS"). The Trust considers itself to be engaged in only one
industry segment, investment in mortgages.
The Trust has elected to be treated as a real estate investment trust ("REIT"),
under the Internal Revenue Code of 1986, as amended. The Trust shall terminate
on December 31, 2029 unless earlier terminated by the affirmative vote of
holders of a majority of the outstanding Shares entitled to vote thereon. See
Note A of Notes to Financial Statements included in Appendix A of this report
for additional information.
The Trust's investments in PIMs on multi-family residential properties consist
of (1) a MBS or an insured mortgage loan (collectively, the "insured mortgage")
guaranteed or insured as to principal and basic interest, and (2) a
participating mortgage. The insured mortgages were issued or originated under or
in connection with the housing programs of Fannie Mae, the Government National
Mortgage Association ("GNMA"), or the Federal Housing Administration ("FHA")
under the authority of the Department of Housing and Urban Development ("HUD").
PIMs provide the Trust with monthly payments of principal and basic interest and
may also provide for Trust participation in the current revenue stream and in
residual value, if any, from a sale or other realization of the underlying
property. The borrower conveys the participation rights to the Trust through a
subordinated promissory note and mortgage. The participation features are
neither insured nor guaranteed.
The PIMIs consist of (1) an insured mortgage issued by GNMA or originated under
the lending program of the FHA, (2) an additional loan ("Additional Loan") to
the borrower or owners of the borrower in excess of mortgage amounts insured or
guaranteed under GNMA or FHA programs that increases the Trust's total financing
with respect to that property and (3) a participating mortgage. Additional Loans
associated with insured mortgages issued or originated in connection with HUD
insured programs cannot, under government regulations, be collateralized by a
mortgage on the underlying property. These Additional Loans are typically
collateralized by a security interest satisfactory to Berkshire Mortgage
Advisors Limited Partnership ("the Advisor"). The Additional Loans are neither
insured nor guaranteed. In addition, the participation features related to the
participating mortgage are neither insured nor guaranteed. Additional Loans
provide the Trust with semi-annual interest payments and may provide additional
interest in the future while the participating mortgage provides for Trust
participation in the net income and residual value, if any, of the underlying
property.
The Trust also has investments in MBS collateralized by single-family and
multi-family mortgage loans issued or originated by GNMA, FHA, Fannie Mae, the
Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC guarantee
the principal and basic interest of the Fannie Mae and FHLMC MBS, respectively.
GNMA guarantees the timely payment of principal and interest on its MBS, and HUD
insures the pooled mortgage loans underlying the GNMA MBS and FHA mortgage
loans.
The Trust will distribute all proceeds from prepayments or other realizations of
mortgage assets to investors either through quarterly dividends or special
dividends.
Although the Trust will terminate no later than December 31, 2029, the value of
the PIMs and PIMIs may be realized by the Trust through repayment or sale as
early as ten years from the dates of the closings of the permanent loans, and
the Trust may realize the value of all of its other investments within that time
frame thereby resulting in a dissolution of the Trust significantly prior to
December 31, 2029.
The Trust anticipates that there will be sufficient cash flow from the mortgages
to meet cash requirements. To the extent that the Trust's cash flow should be
insufficient to meet the Trust's operating expenses and liabilities, it will be
necessary for the Trust to obtain additional funds by liquidating its investment
in one or more mortgages or by borrowing. The Trust may pledge mortgages as
security for any permitted borrowing.
The Trust may not borrow funds in connection with the acquisition or origination
of mortgages. However, it may borrow funds to meet working capital requirements
of the Trust. In this event, the Trust may borrow funds from third parties on a
short-term basis. The declaration of trust limits the amount that may be
borrowed by the Trust. Borrowing agreements between the Trust and a
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lender may also restrict the amount of indebtedness that the Trust may incur.
The declaration of trust prohibits the Trust from issuing debt securities to
institutional lenders and banks, and the Trust may not issue debt securities to
the public except in some circumstances. The Trust, under some circumstances,
may borrow funds from the advisor, a trustee or an affiliate of the Trust or any
trustee. However, a majority of the independent trustees, not otherwise
interested in such transaction, must approve the transaction as being fair,
competitive and commercially reasonable and no less favorable to the Trust than
loans between unaffiliated lenders and borrowers under the same circumstances.
The Trust has not borrowed any funds during the past and does not intend to do
so in the future.
The FHA coinsurance loan program under Section 221(d)(4) of the National Housing
Act provides for loans with 40 year terms. However, this program allows for a
call option at any time after ten years, upon one year's notice. The Fannie Mae
Delegated Underwriting and Servicing program provides for loans with seven, ten
or 15 year terms and an amortization period of 35 years. The subordinated
promissory notes and subordinated mortgages that secure the participation
feature of the insured mortgages and PIMs and the notes that evidence the
additional loans provide for acceleration of maturity at the earlier of the sale
of the underlying property or the call date.
From time to time, the Trust expects that it may realize the principal and
participation in residual value, if any, of its mortgages before maturity. It is
expected that the mortgages will be repaid after a period of ownership of
approximately ten years from the dates of the closings of the permanent loans.
Realization of the value of mortgages may, however, be made at an earlier or
later date.
The Trust will not underwrite securities of other issuers, offer securities in
exchange for property or invest in securities of other issuers for the purpose
of exercising control and has not engaged in any of these actives during the
past. The declaration of trust does not permit the Trust to issue senior
securities. The Trust has not repurchased or reacquired any of its shares from
shareholders in the past. The Trust may not make loans to the advisor, any
trustee, any affiliate of the advisor or any trustee or any other person, other
than mortgage investments of the type described above. The Trust has not made
any loans other than mortgage investments during the past.
The Trust's investments are not expected to be subject to seasonal fluctuations,
although net income may vary somewhat from quarter to quarter based upon the
participation features of its investments. The requirements for compliance with
federal, state and local regulations to date have not adversely affected the
Trust's operations, and the Trust anticipates no adverse effect in the future.
To qualify as a REIT for federal income tax purposes, the Trust made a valid
election to be so treated and must continue to satisfy a range of complex
requirements including criteria related to its ownership structure, the nature
of its assets, the sources of its income and the amount of its dividends to
shareholders. The Trust intends to qualify as a REIT in each year of operation,
however, certain factors may have an adverse effect on the Trust's REIT status.
If for any taxable year, the Trustees and the Advisor determine that any of the
asset, income, or dividend tests are not likely to be satisfied, the Trust may
be required to borrow money, dispose of mortgages or take other action to avoid
loss of REIT status.
Additionally, if the Trust does not qualify as a REIT for any taxable year, it
will be subject to federal income tax as if it were a corporation and the
shareholders will be taxed as shareholders of a corporation. If the Trust were
taxed as a corporation, the payment of such tax by the Trust would substantially
reduce the funds available for dividends to shareholders. To the extent that
dividends had been made in anticipation of the Trust's qualification as a REIT,
the Trust might be required to borrow additional funds or to liquidate certain
investments in order to pay the applicable tax. Moreover, should the Trust's
election to be taxed as a REIT be terminated or voluntarily revoked, the Trust
may not be able to elect to be treated as a REIT for the following five-year
period.
As of December 31, 2001, there were no personnel directly employed by the Trust.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Trust, any director, officer
or affiliate of the Trust is a party to which would have a material effect on
the Trust and there are no material pending legal proceedings which any of its
investments are subject to.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
There currently is no established public trading market for the Shares.
The number of investors holding Shares as of December 31, 2001 is approximately
11,200.
The Trust has and intends to continue declaring and paying dividends on a
quarterly basis. The Trustees established a dividend rate per Share per quarter
of $.17 per Share per quarter for 2000 and 2001. The Trustees expect to maintain
that rate for 2002.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Trust's financial position and operating results. This information should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and
Supplementary Data, which are included in Item 7 and Item 8 (Appendix A) of this
report, respectively.
<Table>
<Caption>
(Amounts in thousands, except for per Share amounts)
2001 2000 1999 1998 1997
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Total revenues $ 18,532 $ 11,076 $ 15,632 $ 21,922 $ 17,618
Net income $ 15,972 $ 8,429 $ 12,317 $ 14,836 $ 12,899
Net income per Share $ 1.06 $ .56 $ .82 $ .99 $ .86
Weighted average Shares
outstanding 15,053 15,053 15,053 15,053 15,053
Total assets at
December 31 $ 130,786 $ 140,131 $ 142,096 $ 171,422 $ 221,779
Average dividends
per Share $ 1.61 $ .68 $ 2.60 $ 4.16 $ 2.22
</Table>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the Trust's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors include, among other
things, federal, state or local regulations; adverse changes in general economic
or local conditions; the inability of the borrower to meet financial obligations
on additional loans; pre-payments of mortgages; failure of borrowers to pay
participation interests due to poor operating results at properties underlying
the mortgages; uninsured losses and potential conflicts of interest between the
Trust and its Affiliates, including the Advisor.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001 the Trust had liquidity consisting of cash and cash
equivalents, of approximately $13.2 million as well as the cash inflows provided
by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also receive
additional cash flow
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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 $2.6 million, and special dividends. 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. The current
dividend rate is $.17 per Share per quarter. The Trustees, based on the
Advisor's recommendations, generally set a dividend rate that provides for level
quarterly dividends. To the extent quarterly dividends do not fully utilize the
cash available for distribution and cash balances increase, the Trustees may
adjust the dividend rate or distribute such funds through a special dividend.
In addition to providing guaranteed or insured monthly principal and interest
payments, the Trust's investments in PIMs and PIMIs also may provide additional
income through the interest on the Additional Loan portion of the PIMIs as well
as participation income based on operating cash flow and an increase in the
value realized upon the sale or refinance of the underlying properties. However,
these payments are neither guaranteed nor insured and depend upon the successful
operations of the underlying properties.
The Trust received both installments of Additional Loan interest due in 2001
from the Red Run PIMI. Two other PIMI investments, Mountain View and Windward
Lakes operate under workout agreements with the Trust that require Additional
Loan interest payments only if Surplus Cash, as defined by HUD, is generated
through property operations. Neither of these properties generated Surplus Cash
for the periods ending December 31, 2000 or June 30, 2001; consequently, the
Trust did not receive any Additional Loan interest.
The Trust received participation interest based on cash flow generated by
property operations from six of its investments during the twelve months ended
December 31, 2001. Waterford Townhomes paid $60,502, Red Run paid $72,841, The
Seasons paid $50,750, Lifestyles paid $118,968, Rivergreens paid $69,067 and
Lincoln Green paid $223,873.
Three properties operate under workout agreements with the Trust. Windward
Lakes' operating results deteriorated during 1995 and 1996, and in early 1997
the independent Trustees approved a workout with the borrower of the Windward
Lakes PIMI, an affiliate of the Advisor of the Trust. In the workout, the Trust
agreed to reduce the effective basic interest rate on the insured first mortgage
by 2% per annum for 1997 and 1% per annum for 1998, 1999 and 2000. The borrower
made an equity contribution of $133,036 to the property and agreed to cap the
annual management fee paid to an affiliate at 3% of revenues. The Trust's
participation in current operations is 50% of any Surplus Cash as determined
under HUD guidelines, and the Additional Loan interest is payable out of its
share of Surplus Cash. Any unpaid Additional Loan interest accrues at 7.5% per
annum. When the property is sold or refinanced, the Trust will receive 50% of
any net proceeds remaining after repayment of the insured mortgage, the
Additional Loan, the interest rate relief, accrued and unpaid Additional Loan
interest and the Borrower's equity up to the point that the Trust has received a
cumulative, non-compounded 10% preferred return on its investment in the PIMI.
In May 1998, the borrower on the Lifestyles PIMI defaulted on its debt service
payment on the insured first mortgage. The Trust agreed to a new workout that
runs through 2007. Under its terms, the Trust agreed to reduce the effective
interest rate on the insured first mortgage by 1.75% retroactively for 1998 to
clear the default, by 1.75% for 1999, and by 1.5% each year thereafter until the
property is sold or refinanced. An affiliate of the Advisor refunds
approximately .25% per annum to the Trust related to the interest reduction. The
borrower made a $550,000 equity contribution, which was escrowed, for the
exclusive purpose of correcting deferred maintenance and making capital
improvements to the property. The escrow has been used up for paint, building
repairs, parking lot repairs, a new fitness facility, clubhouse remodeling and
landscaping. Any Surplus Cash that is generated by property operations will be
split evenly between the Trust and the borrower. When the property is sold or
refinanced, the first $1,100,000 of any proceeds remaining after the insured
mortgage is paid off will be split 50% / 50% between the Trust and the borrower;
the next $1,690,220 of proceeds will be split 75% to the Trust and 25% to the
borrower; and any remaining proceeds will be split 50% / 50%. The borrower's new
equity and the reduction in the effective interest rate on the insured first
mortgage have provided funds for repairs and improvements that have helped
reposition Lifestyles. As a result of the performance of the property, the Trust
had initially established a valuation allowance of $1,130,316 on the Additional
Loan in 1998. During 2001, the Trust received a payment of $118,968 which was
recorded as a reduction in the principal balance of the Additional Loan and
related impairment provision. Based on improved market conditions and property
operations, the Trust has further reduced the impairment provision by $344,389
to $666,539 in the fourth quarter of 2001.
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Mountain View is similar to Lifestyles with respect to competitive market
conditions. In June 1999, the Trust approved a second workout that runs through
2004. Under its terms, the Trust agreed to reduce the effective interest rate on
the insured first mortgage by 1.25% retroactively for 1999 and each year
thereafter until the property is sold or refinanced, and to change the
participation terms. The workout eliminated the preferred return feature,
forgave $288,580 of previous accruals of Additional Loan interest related to the
first workout, and changed the Trust's participation in Surplus Cash generated
by the property. 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 Additional
Loan interest. Unpaid Additional Loan interest related to the second workout
will accrue and be payable if there are sufficient proceeds from a sale or
refinancing of the property. In addition, the borrower repaid $153,600 of the
Additional Loan and funded approximately $54,000 to a reserve for property
improvements. As a result of the factors described above, the Advisor determined
that the Additional Loan collateralized by the Mountain View asset was impaired
and maintains a valuation allowance of $1,032,272.
Each of the above restructurings were to interest rate levels that were at the
then prevailing rate for similar instruments and therefore did not meet the
criteria for a troubled debt restructuring.
Whether the operating performance at any of the properties mentioned above
provide sufficient cash flow from operations to pay either the Additional Loan
interest or participation income will depend on factors that the Trust has
little or no control over. Should the properties be unable to generate
sufficient cash flow to pay the Additional Loan interest, it would reduce the
Trust's distributable cash flow and could affect the value of the Additional
Loan collateral.
There are contractual restrictions on the repayment of the PIMs and PIMIs.
During the first five years of the investment, borrowers are prohibited from
repayment. During the second five years, the PIM borrowers can prepay the
insured first mortgage by paying the greater of a prepayment premium or the
participation due at the time of the prepayment. Similarly, the PIMI borrowers
can prepay the insured first mortgage and the Additional Loan by satisfying any
contractual obligations. The participation features and Additional Loans are
neither insured nor guaranteed. If the prepayment of the PIM or PIMI results
from the foreclosure on the underlying property or an insurance claim, the Trust
would probably not receive any participation income or any amounts due under the
Additional Loan.
On January 2, 2002, the Trust received a prepayment of the Waterford Apartments
Subordinate Promissory note. The Trust received $379,725 of Minimum Additional
Interest and $425,643 of Shared Appreciation Interest. On January 17, 2002, the
Trust received $6,625,742 representing the principal proceeds on the first
mortgage. In addition, the Trust received a prepayment premium of $66,257 from
the payoff. The Advisor has declared a special dividend of $0.51 per share from
the proceeds of the Waterford Apartments PIM prepayment which will be paid in
the first quarter of 2002.
On December 31, 2001, the Trust received a prepayment of the Red Run Additional
Loan. The Trust received $2,900,000 of Additional Loan principal, $238,369 of
Shared Appreciation Interest, $3,506,952 of preferred interest and $67,667 of
Base Interest on the Additional Loan. In addition, the Trust recognized $702,259
of Additional Loan interest that had been previously received and recorded in
deferred income on additional loans. On January 3, 2002, the Trust received
$18,330,825 representing the principal proceeds on the first mortgage note. The
Advisor declared a special dividend of $1.68 per share from the proceeds of the
Red Run PIMI prepayment which was paid on January 16, 2002.
On July 23, 2001, the Trust received a prepayment of the Seasons Subordinated
Promissory Note and the Seasons Additional Loan. The Trust received $1,924,649
of Additional Loan principal, $180,916 of surplus cash, $847,450 of preferred
interest, $1,052,455 of contingent interest, $69,129 of Base Interest on the
Additional Loan and $1,299,562 which represents the Trust's portion of the
residual split. The Trust received $8,567,890 representing the principal
proceeds on the first mortgage note on July 26, 2001. In addition, the Trust
recognized $180,633 of Additional Loan interest that had been previously
received and recorded in deferred income on additional loans. On August 17,
2001, the Advisor paid a special dividend of $0.93 per share from the proceeds
of the Seasons PIMI prepayment.
The payoff of the Seasons PIMI was a result of the sale of the underlying
property by the borrower, Maryland Associates Limited Partnership ("MALP"),
which is an affiliate of the Adviser, to an affiliate of MALP's general partner.
Because the sale of the underlying property was to an affiliate, the Independent
Trustees of the Trust were required to approve the transaction, which they did
based upon a number of factors, including an appraisal of the underlying
property prepared by an independent third party MAI appraiser. The purchase
price paid by the affiliate for the underlying property was $1.6 million greater
than the value indicated by such appraisal. Both the Trustees and the Advisor
believed that the market capitalization rate utilized in the appraisal was too
high based on their knowledge of recent sales in the market and agreed that the
true fair value was the ultimate purchase price paid by the affiliate.
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During the third quarter of 1999, the Trust received a prepayment of the Audubon
Villas PIMI when the property was refinanced. The Trust received the prepayment
of the principal balance of the insured mortgage of $14,861,957, the principal
balance of 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 Audubon Villas PIMI.
The Trust has the option to call certain PIMs and all the PIMIs by accelerating
their maturity. If the call feature is exercised for the whole PIM or PIMI then
the insurance feature of the loan will be canceled. Therefore, the Advisor will
determine the merits of exercising the call option for each PIM and PIMI as
economic conditions warrant. Such factors as the condition of the asset, local
market conditions, the interest rate environment and available financing will
have an impact on these decisions.
CRITICAL ACCOUNTING POLICIES
The Trust's critical accounting policies relate primarily to revenue recognition
related to the participation features of the Trust's PIM and PIMI investments as
well as the recognition of deferred interest income on the Additional Loans. The
Trust's policies are as follows:
Basic interest is recognized based on the stated rate of the Department of
Housing and Urban Development ("HUD") Insured Mortgage loan (less the servicer's
fee) or the coupon rate of the Government National Mortgage Association ("GNMA")
or Fannie Mae MBS. The Trust recognizes interest related to the participation
features when the amount becomes fixed and the transaction that gives rise to
such amount is finalized, cash is received and all contingencies are
resolved. This could be the sale or refinancing of the underlying real
estate, which results in a cash payment to the Trust or a cash payment made
to the Trust from surplus cash relative to the participation feature. The
Trust defers the recognition of Additional Loan interest payments as income
to the extent these interest payments were from escrows established with the
proceeds of the Additional Loan. When the properties underlying the PIMI's
generate sufficient cash flow to make the required Additional Loan interest
payments and the Additional Loan value is deemed collectible, the Trust
recognizes income as earned and commences amortization of the deferred
interest amounts into income over the remaining estimated term of the
Additional Loan. During periods where mortgage loans are impaired the Trust
suspends amortizing deferred interest.
The Trust also fully reserves the portion of any Additional Loan interest
payment satisfied through the issuance of an operating loan and any associated
interest due on such operating loan. The Trust will recognize the income related
to the operating loan when the borrower repays amounts due under the operating
loan.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSESSMENT OF CREDIT RISK
The Trust's investments in insured mortgages and MBS are guaranteed and/or
insured by Fannie Mae, FHLMC, GNMA and 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. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States with significant experience in mortgage securitizations. In
addition, their MBS instruments carry the highest credit rating given to
financial instruments. 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.
Collection of the principal and interest of the Additional Loans and interest on
the participation features 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, ability to
maintain the properties and obtain adequate insurance coverage. Operations also
may be effected by 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's investments also include cash and cash equivalents of approximately
$6.2 million of Agency paper, which is issued by Government Sponsored
Enterprises with a credit rating equal to the top rating category of a
nationally recognized statistical rating organization.
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INTEREST RATE RISK
The Trust's primary market risk exposure is to interest rate risk, which can be
defined as the exposure of the Trust's net income, comprehensive income or
financial condition to adverse movements in interest rates. At December 31,
2001, the Trust's PIMs, PIMIs and MBS comprise the majority of the Trust's
assets. Decreases in interest rates may accelerate the prepayment of the Trust's
investments. The Trust does not utilize any derivatives or other instruments to
manage this risk as the Trust plans to hold its PIM and PIMI investments to
expected maturity while it is expected that substantially all of the MBS will
prepay over the same time period, thereby mitigating any potential interest rate
risk to the disposition value of any remaining MBS.
The Trust monitors prepayments and considers prepayment trends, as well as
dividend requirements of the Trust, when setting regular dividend policy. For
MBS, the fund forecasts prepayments based on trends in similar securities as
reported by statistical reporting entities such as Bloomberg. For PIMs and
PIMIs, the Trust incorporates prepayment assumptions into planning as individual
properties notify the Trust of the intent to prepay or as they are scheduled to
mature.
The following table provides information about the Trust's financial instruments
that are sensitive to changes in interest rates. For mortgage investments, the
table presents principal cash flows and related weighted average interest rates
("WAIR") by expected maturity dates. The expected maturity date is contractual
maturity adjusted for expectations of prepayments.
<Table>
<Caption>
Expected maturity dates ($ in thousands)
------------------------------------------------------------------------------------------------
Total
2002 2003 2004 2005 2006 Thereafter Face Value Fair Value(1)
------------------------------------------------------------------------------------------------
Interest-sensitive assets:
MBS $ 900 $ 744 $ 621 $ 524 $ 448 $ 11,354 $ 14,591 $ 15,299
WAIR 8.17% 8.17% 8.17% 8.17% 8.17% 8.17% 8.17%
PIMS 29,467 133 144 157 170 16,345 46,416 47,803
WAIR 8.07% 8.07% 8.07% 8.07% 8.07% 8.07% 7.67%
PIMIS 18,556 245 266 290 315 31,140 50,812 51,828
WAIR 7.59% 7.59% 7.59% 7.94% 7.94% 7.94% 7.69%
Additional Loans 2.471 1,400 - - - 1,818 5,689 3,871
WAIR 4.98% 3.05% 0% 0% 0% 0% 4.98%
-------- -------- -------- -------- ------- ---------- ----------- ----------
Total Interest-
Sensitive Assets $ 51,394 $ 2,522 $ 1,031 $ 971 $ 933 $ 60,657 $ 117,508 $ 118,801
======== ======== ======== ======== ======= ========== =========== ==========
</Table>
(1) The methodology used by the Trust to estimate the fair value of each class
of financial instrument is described in Note J to the Trust's financial
statements presented in Appendix A to this report. As described in that
note, the Trust does not include an estimate of value for the participation
interest associated with its PIM and PIMI investments.
8
<Page>
OPERATIONS
The following discussion relates to the operations of the Trust during the years
ended December 31, 2001, 2000 and 1999. Dollars are stated in thousands, except
for per Share amounts.
<Table>
<Caption>
Years Ended December 31,
---------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------
Per Per Per
Amount Share Amount Share Amount Share
-------- -------- -------- -------- -------- --------
Interest income on PIMs
and PIMIs:
Basic interest $ 7,901 $ .52 $ 8,087 $ .54 $ 8,789 $ .58
Additional Loan interest 1,515 .10 744 .05 2,535 .18
Participation interest 7,603 .51 505 .03 2,269 .15
Interest income on MBS 1,251 .08 1,376 .09 1,531 .10
Interest income on cash
and cash equivalents 262 .02 365 .02 508 .03
Trust expenses (1,671) (.11) (1,618) (.10) (1,595) (.11)
Amortization of prepaid
fees and expenses (1,353) (.09) (1,030) (.07) (1,672) (.11)
Reduction of (provision for) impaired
Additional Loans 464 .03 - - (48) -
-------- -------- -------- -------- -------- --------
Net income $ 15,972 $ 1.06 $ 8,429 $ .56 $ 12,317 $ .82
======== ======== ======== ======== ======== ========
Weighted average Shares outstanding 15,053,135 15,053,135 15,053,135
========== ========== ==========
</Table>
The Trust's net income increased in 2001 when compared to 2000 due primarily to
increases in Additional Loan and participation interest and a decrease in
provision for impaired mortgage loans. Additional Loan interest increased
primarily due to the recognition of deferred revenue from the Season's and the
Red Run Additional Loan payoffs. Participation interest increased due to the
collection of participation interest from the Season's and Red Run payoffs (see
discussion above). The provision for impaired mortgage loans decreased due to an
improvement in the performance of the Lifestyles apartments.
The Trust's net income decreased by approximately $3.9 million for 2000 when
compared to 1999 due primarily to decreases in interest income net of decreases
in amortization expense and asset management fees due to an affiliate. Basic
interest on PIMs and PIMIs, Additional Loan Interest, and participation interest
decreased by $4.3 million in 2000 primarily due to the payoff of the Audubon
Villas PIMI in the third quarter of 1999. Interest income on MBS will continue
to decline as principal collections reduce the MBS investment balance. Interest
income on cash and cash equivalents decreased due to lower average cash
balances. Amortization expense decreased due to the payoff of the Audubon Villas
PIMI. The decrease in asset management fees is due to the Trust's asset base
declining.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
9
<Page>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the Trustees and Executive Officers of Krupp Government
Income Trust is as follows:
<Table>
<Caption>
Position with Krupp Date of Term
Name and Age Government Income Trust Election Expires
--------------------------- ------------------------------------------ --------------- ---------
Douglas Krupp (55) Chairman of Board of Trustees and Trustee May, 1996 May, 2002
* Charles N. Goldberg (60) Trustee March, 1990 May, 2002
* J. Paul Finnegan (77) Trustee March, 1990 May, 2002
* Stephen Puleo (67) Trustee February, 2001 May, 2002
Robert A. Barrows (44) Treasurer August, 1995 N/A
Scott D. Spelfogel (41) Clerk July, 1990 N/A
MaryBeth Bloom (28) Assistant Clerk November, 2000 N/A
</Table>
* Independent Trustee
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer
of The Berkshire Group, an integrated real estate financial services firm
engaged in real estate acquisition and property management, investment
sponsorship, venture capital investing, mortgage banking, financial management,
and ownership of two operating companies through private equity investments. Mr.
Krupp has held the position of Co-Chairman since The Berkshire Group was
established as The Krupp Companies in 1969 and he has served as the Chief
Executive Officer since 1992. He is a graduate of Bryant College where he
received an honorary Doctor of Science in Business Administration in 1989.
Charles N. Goldberg is currently a partner of Oppel, Goldberg and Saenz, LLC.
Prior to that, he was of counsel to the law firm of Broocks, Baker & Lange,
L.L.P., which position he held from December of 1997 to May of 2000. Prior to
joining Broocks, Baker & Lange, L.L.P., Mr. Goldberg was a partner in the law
firm of Hirsch & Westheimer from March of 1996 to December of 1997. Prior to
Hirsch & Westheimer, he was the Managing Partner of Goldberg Brown, Attorneys at
Law from 1980 to March of 1996. He received a B.B.A. degree and a J.D. degree
from the University of Texas. He is a member of the State Bar of Texas and is
admitted to practice before the U.S. Court of Appeals, Fifth Circuit and U.S.
District Court, Southern District of Texas. He currently serves as a Trustee of
Krupp Government Income Trust and Krupp Government Income Trust II.
J. Paul Finnegan retired as a partner of Coopers & Lybrand in 1987. Since then,
he has been engaged in business as a consultant, director, and arbitrator. Mr.
Finnegan holds a B.A. degree from Harvard College, a J.D. degree from Boston
College Law School and an ASA degree from Bentley College. Mr. Finnegan is a
Certified Public Accountant and an attorney. Mr. Finnegan currently serves as a
Trustee of Krupp Government Income Trust and Krupp Government Income Trust II
and as director of Scituate Federal Savings Bank.
Stephen Puleo is currently engaged in business as a consultant and director. He
retired as a director of Coopers & Lybrand, an international accounting and
consulting firm where he worked from 1995 to 1997 primarily servicing real
estate industry clients. From 1993 to 1994, Mr. Puleo was a tax director for
Deloitte & Touche. From 1984 to 1993, Mr. Puleo held the positions of Executive
Vice President and Chief Financial Officer of a predecessor to The Berkshire
Group. Prior to that, Mr. Puleo was the Chairman of the National Real Estate
Industry Group of Coopers & Lybrand where he provided various real estate
services and was a senior tax partner in charge of the Northeast Region. He is a
graduate of McNeese State University and attended the Executive Development
Program at the Tuck School of Business at Dartmouth College. He is a Certified
Public Accountant and currently serves as director of Simpson Housing Limited
Partnership of Denver, Colorado. He currently serves as a Trustee of Krupp
Government Income Trust and Krupp Government Income Trust II.
Robert A. Barrows is the Treasurer of the Trust, Senior Vice President and Chief
Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has held several
positions within The Berkshire Group since joining the company in 1983 and is
currently responsible for accounting, financial reporting and treasury functions
for Berkshire Mortgage Finance. Prior to joining The Berkshire Group, he was an
audit supervisor for Coopers & Lybrand L.L.P. in Boston. He received a B.S.
degree from Boston College and is a Certified Public Accountant.
Scott D. Spelfogel is the Clerk of the Trust, Senior Vice President and General
Counsel to The Berkshire Group. Prior to 1997, he served as Vice President and
Assistant General Counsel. Before joining the firm in November 1988, he was a
litigator in private practice in Boston. He received a Bachelor of Science
degree in Business Administration from Boston University, a Juris Doctor
10
<Page>
Degree from Syracuse University's College of Law, and a Master of Laws degree in
Taxation from Boston University Law School. He is admitted to practice law in
Massachusetts and New York, is a member of the American, Boston, Massachusetts
and New York State bar associations and is a licensed real estate broker in
Massachusetts.
MaryBeth Bloom is the Assistant Clerk of the Trust and is Assistant General
Counsel to The Berkshire Group. Prior to joining the company in August, 2000,
she was an attorney with John Hancock Financial Services. She received a B.A.
degree from the College of the Holy Cross in 1995 and a J.D. degree from New
England School of Law in 1998. She is admitted to practice law in Massachusetts
and New York and is a member of the American Bar Association.
In addition, the following are deemed to be Executive Officers of the
registrant:
George Krupp (age 57) is the Co-Founder and Co-Chairman of The Berkshire Group,
an integrated real estate financial services firm engaged in real estate
acquisition and property management, investment sponsorship, venture capital
investing, mortgage banking, financial management, and ownership of two
operating companies through private equity investments. Mr. Krupp has held the
position of Co-Chairman since The Berkshire Group was established as The Krupp
Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish
High School in Waltham, Massachusetts since September of 1997. Mr. Krupp
attended the University of Pennsylvania and Harvard University and holds a
Master's Degree in History from Brown University. Douglas and George Krupp are
brothers.
Peter F. Donovan (age 48) is Chief Executive Officer of Berkshire Mortgage
Finance which position he has held since January of 1998 and in this capacity,
he oversees the strategic growth plans of this mortgage banking firm. Berkshire
Mortgage Finance is the 10th largest in the United States based on servicing and
asset management of an $14.1 billion loan portfolio. Previously he served as
President of Berkshire Mortgage Finance from January of 1993 to January of 1998
and in that capacity he directed the production, underwriting, servicing and
asset management activities of the firm. Prior to that, he was Senior Vice
President of Berkshire Mortgage Finance and was responsible for all
participating mortgage originations. Before joining the firm in 1984, he was
Second Vice President, Real Estate Finance for Continental Illinois National
Bank & Trust, where he managed a $300 million construction loan portfolio of
commercial properties. Mr. Donovan received a B.A. from Trinity College and an
M.B.A. degree from Northwestern University. Mr. Donovan is currently a member of
the Advisory Council for Fannie Mae.
Ronald Halpern (age 60) is President and Chief Operating Officer of Berkshire
Mortgage Finance. He has served in these positions since January of 1998 and in
this capacity, he is responsible for the overall operations of the Company.
Prior to January of 1998, he was Executive Vice President, managing the
underwriting, closing, portfolio management and servicing departments for
Berkshire Mortgage Finance. Before joining the firm in 1987, he held senior
management positions with the Department of Housing and Urban Development in
Washington D.C. and several HUD regional offices. Mr. Halpern has over 30 years
of experience in real estate finance which includes his experience as prior
Chairman of the MBA Multifamily Housing Committee. He holds a B.A. degree from
the University of the City of New York and a J.D. degree from Brooklyn Law
School.
Carol J.C. Mills (age 52) is Senior Vice President for Loan Management of
Berkshire Mortgage Finance and in this capacity, she is responsible for the Loan
Servicing and Asset Management functions of Berkshire Mortgage Finance. She
manages the estimated $14.1 billion portfolio of loans. Ms. Mills joined
Berkshire in December 1997 as Vice President and was promoted to Senior Vice
President in January 1999. From January 1989 through November 1997, Ms. Mills
was Vice President of First Winthrop Corporation and Winthrop Financial
Associates, in Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke
College and a Master of Architecture degree from Harvard University. Ms. Mills
is a member of the Real Estate Finance Association, New England Women in Real
Estate and the Mortgage Bankers Association. Ms. Mills is currently a member of
the Servicing Advisory Council for Freddie Mac.
ITEM 11. EXECUTIVE COMPENSATION
Except for the Independent Trustees as described below, the Trustees and
Officers of the Trust have not been and will not be compensated by the Trust for
their services. However, the Officers will be compensated by the Advisor or an
affiliate of the Advisor.
COMPENSATION OF TRUSTEES
The Trust paid each of the Independent Trustees (Charles N. Goldberg, J. Paul
Finnegan and Stephen Puleo) a fee of $25,000 in 2001.
11
<Page>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 8, 2002, no person owned of record or was known by the Advisor to
own beneficially more than 5% of the Trust's 15,053,135 outstanding Shares. The
only shares held by the Advisor or any of its affiliates consist of the original
10,000 Shares.
<Table>
<Caption>
Class of Name of Beneficial Amount and Nature of Percent
Stock Owner Beneficial Interest of Class
- ---------- ------------------- -------------------- --------
Shares of Douglas Krupp
Beneficial One Beacon Street
Interest Boston, Mass. 02108 10,000 Shares** ***
Shares of
Beneficial All Directors and
Interest Officers 10,000 Shares ***
</Table>
** Mr. Krupp is a beneficial owner of the 10,000 shares held by Berkshire
Mortgage Advisors Limited Partnership, the Advisor to the Company, by virtue of
being a director of Berkshire Funding Corporation, the general partner of
Berkshire Mortgage Advisors Limited Partnership. In each case where Mr. Krupp is
a beneficial owner of shares he has shared voting and investment powers.
*** The amount owned does not exceed one percent of the shares of
beneficial interest of the Trust outstanding as of January 8, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of the Advisory Service Agreement, the Advisor receives an Asset
Management Fee equal to .75% per annum of the value of the Trust's actual and
committed invested assets payable quarterly. During 2001, the Advisor received
$950,966 related to the Asset Management Fee.
The Trust also reimburses affiliates of the Advisor for certain costs incurred
in connection with maintaining the books and records of the Trust, the
preparation and mailing of financial reports, tax information and other
communications to investors and legal fees and expenses. During 2001, The
Berkshire Companies Limited Partnership and Berkshire Mortgage Finance Limited
Partnership, affiliates of the Advisor, received a total of $255,142 in
reimbursements.
During the year ended December 31, 2001, the Trust received interest collections
on the Seasons Additional Loan of $155,738. In addition, the Trust received
$3,431,133 in 2001 related to Participating Interest Income on the Seasons
PIMI. Maryland Associates Limited Partnership was the owner of the Seasons.
The Krupp Company Limited Partnership-IV, the general partner of Maryland
Associates Limited Partnership, is an affiliate of the Advisor.
ITEM 14. CONTROLS AND PROCEDURES
Not applicable.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements, Schedule
and Supplementary Data included under Item 8, Appendix A, on page
F-2 of this report.
2. Financial Statement Schedule - see Index to Financial Statements,
Schedule and Supplementary Data included under Item 8, Appendix A,
on page F-2 of this report. All other schedules are omitted as they
are not applicable, not required or the information is provided in
the Financial Statements or the Notes thereto.
(b) REPORTS ON FORM 8-K
During the last quarter of the year ended December 31, 2001, the Trust
did not file any reports on Form 8-K.
(c) Exhibits:
NUMBER AND DESCRIPTION
UNDER REGULATION S-K
12
<Page>
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K:
(4) Instruments defining the rights of security holders including
indentures:
(4.1) Second Amended and Restated Declaration of Trust filed with
The Massachusetts Secretary of State on April 12, 1990
[Included as Exhibit 4.4 to Prospectus included in
Pre-effective Amendment No. 3 to Registrant's Registration
Statement on Form S-11 dated April 16, 1990 (File No.
33-31942)].*
(4.2) Subscription Agreement Specimen [Included as Exhibit C to
Prospectus included in Pre-effective Amendment No. 2 to
Registrant's Registration Statement on Form S-11 dated March
23, 1990 (File No. 33-31942)].*
(10) Material Contracts:
(10.1) Advisory Services Agreement dated October 22, 1990 between
the Trustee and Krupp Mortgage Advisors Limited Partnership.
[Exhibit 10.1 to Registrant's report on Form 10-K for the
year ended December 31, 1994 (File No. 0-19244)].*
(10.2) Assignment and Assumption Agreement dated December 29, 1994
by and between Berkshire Realty Advisors Limited Partnership
(formerly known as Krupp Realty Advisors Limited Partnership
("Assignor") and Berkshire Mortgage Advisors Limited
Partnership ("Assignee") [Exhibit 10.2 to Registrant's
report on Form 10-K for the year ended December 31, 1994
(File No. 0-19244)].*
LIFESTYLES APARTMENTS
(10.3) Subordinated Promissory Note dated December 11, 1990 between
Lifestyles At Boot Ranch (the "Mortgagor") and Krupp
Government Income Trust (the "Holder") [Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990 (File No. 33-31942)].*
(10.4) Agreement RE Subordinated Note dated December 11, 1990
between Krupp Government Income Trust and Krupp Mortgage
Corporation [Exhibit 10.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File
No. 33-31942)].*
(10.5) Subordinated Multifamily Mortgage dated December 11, 1990
between Lifestyles at Boot Ranch (the "Mortgagor") and Krupp
Government Income Trust (the "Mortgagee") [Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990 (File No. 33-31942)].*
(10.6) Additional Loan Agreement dated December 11, 1990 between
FL-Tampa, Inc. and M & D Palm Harbor, Inc (collectively, the
"Borrowers") and Krupp Government Income Trust (the
"Holder") [Exhibit 10.4 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File
No. 33-31942)].*
(10.7) Additional Loan Note dated December 11, 1990 between
FL-Tampa, Inc and M & D Palm Harbor, Inc. (collectively, the
"Borrowers") and Krupp Government Income Trust (the
"Holder") [Exhibit 10.5 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File
No. 33-31942)].*
(10.8) Mortgage Note dated December 11, 1991 between Lifestyles at
Boot Ranch (the "Borrower") and Krupp Mortgage Corporation
(the "Holder"). [Exhibit 10.6 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991
(File No. 0-19244)].*
(10.9) GNMA Purchase Agreement dated December 11, 1991 between
Krupp Government Income Trust and Krupp Mortgage
Corporation. [Exhibit 10.7 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991 (File
No. 0-19244)].*
(10.10) Modification Agreement by and between Krupp Government
Income Trust and Lifestyles at Boot Ranch and M&D Palm
Harbor, and FL-Tampa Inc. [Exhibit 10.1 to Registrant's
report on Form 10-Q for the quarter ended September 30, 1996
(File No. 0-19244)].*
13
<Page>
(10.11) Escrow Deposit Agreement by and between Krupp Government
Income Trust and M&D Palm Harbor, and FL-Tampa Inc. the
general partners of Lifestyles at Boot Ranch. [Exhibit 10.2
to Registrant's report on Form 10-Q for the quarter ended
September 30, 1996 (File No. 0-19244)].*
(10.12) Second Modification Agreement by and between Krupp
Government Income Trust and Lifestyles at Boot Ranch and M&D
Palm Harbor Partnership and FL-Tampa, Inc. [Exhibit 10.1 to
Registrant's report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 0-19244)].*
WINDWARD LAKES APARTMENTS
(10.13) Subordinated Promissory Note dated December 28, 1990 between
the McNab-K C 3 Limited Partnership (the "Mortgagor") and
Krupp Government Income Trust (the "Holder") [Exhibit 10.6
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (File No. 33-31942)].*
(10.14) Additional Loan Agreement dated December 28, 1990 between
George Krupp, Douglas Krupp and Krupp GP, Inc.
(collectively, the "Borrowers") and Krupp Government Income
Trust (the "Holder") [Exhibit 10.7 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1990 (File No. 33-31942)].*
(10.15) Additional Loan Note dated December 28, 1990 between Krupp
GP, Inc., George Krupp and Douglas Krupp (collectively, the
"Borrowers") and Krupp Government Income Trust (the
"Holder") [Exhibit 10.8 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File
No. 33-31942)].*
(10.16) Agreement RE Subordinated Note dated December 28, 1990
between Krupp Government Income Trust and Love Funding
Corporation. [Exhibit 10.11 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991 (File
No. 0-19244)].*
(10.17) Subordinated Multi-family Mortgage dated December 28, 1991
between McNab-KC3 Limited Partnership (the "Borrower") and
Krupp Government Income Trust (the "Lender"). [Exhibit 10.12
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991 (File No. 0-19244)].*
(10.18) GNMA Purchase Agreement dated December 28, 1991 between
Krupp Government Income Trust and Love Funding Corporation.
[Exhibit 10.13 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 (File No.
0-19244)].*
(10.19) Modification Agreement between Krupp Government Income
Trust, Love Funding Corporation, McNab-KC3 Limited
Partnership, and Krupp GP, Inc. [Exhibit 10.19 to
Registrant's report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 0-19244)].*
RIVER VIEW APARTMENTS
(10.20) Subordinated Promissory Note dated April 2, 1991 between
Sterling Partners III Limited Partnership (the "Mortgagor")
and Krupp Government Income Trust (the "Holder") [Exhibit
19.1 to Registrant's report on Form 10-Q for the quarter
ended June 30, 1991 (File No. 0-19244)].*
(10.21) Agreement RE Subordinated Promissory Note dated April 2,
1991 between Krupp Government Income Trust and Love Funding
Corporation [Exhibit 19.2 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.22) Subordinated Multifamily Mortgage dated April 2, 1991
between Sterling Partners III Limited Partnership (the
"Mortgagor") and Krupp Government Income Trust (the
"Mortgagee") [Exhibit 19.3 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.23) Supplement to Prospectus dated May 1, 1991 for Government
National Mortgage Association Pool Number 280840 [Exhibit
19.4 to Registrant's report on Form 10-Q for the quarter
ended June 30, 1991 (File No. 0-19244)].*
14
<Page>
MILL POND APARTMENTS
(10.24) Subordinated Promissory Note dated May 28, 1991 between Mill
Pond Limited Partnership (the "Mortgagor") and Krupp
Government Income Trust (the "Holder") [Exhibit 19.5 to
Registrant's report on Form 10-Q for the quarter ended June
30, 1991 (File No. 0-19244)].*
(10.25) Agreement RE Subordinated Promissory Note dated May 28, 1991
between Krupp Government Income Trust and Krupp Mortgage
Corporation [Exhibit 19.6 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.26) Subordinated Multifamily Mortgage dated May 28, 1991 between
Mill Pond Limited Partnership (the "Mortgagor") and Krupp
Government Income Trust (the "Mortgagee") [Exhibit 19.7 to
Registrant's report on Form 10-Q for the quarter ended June
30, 1991 (File No. 0-19244)].*
(10.27) Mortgage Note dated May 28, 1991 between Krupp Mortgage
Corporation (the "Holder") and Mill Pond Apartments (the
"Borrower") [Exhibit 19.8 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.28) Participation Agreement dated May 28, 1991 between Krupp
Mortgage Corporation (the "Mortgagee") and Krupp Government
Income Trust [Exhibit 19.9 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.29) Assignment of Open End Mortgage Deed and Security Agreement
dated May 28, 1991 between Krupp Mortgage Corporation (the
"Assignor") and Krupp Government Income Trust (the
"Assignee") [Exhibit 19.1 to Registrants report on Form 10-Q
for the quarter ended September 30, 1991 (File No.
0-19244)].*
RIVERGREENS APARTMENTS
(10.30) Subordinated Promissory Note dated November 14, 1991 between
Rivergreens Associates Limited Partnership (the "Mortgagor")
and Krupp Government Income Trust (the "Holder"). [Exhibit
10.33 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (File No. 0-19244)].*
(10.31) Agreement Re-Subordinated Promissory Note dated November 14,
1991 between Krupp Government Income Trust and Krupp
Mortgage Corporation. [Exhibit 10.34 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991 (File No. 0-19244)].*
(10.32) Subordinated Multifamily Deed of Trust dated November 14,
1991 between Rivergreens Associates Limited Partnership (the
"Borrower"), Oregon Title Insurance Company (the "Trustee")
and Krupp Government Income Trust (the "Lender"). [Exhibit
10.35 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (File No. 0-19244)].*
(10.33) Mortgage Note dated November 14, 1991 between Krupp Mortgage
Corporation and Rivergreens Associates Limited Partnership.
[Exhibit 10.36 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 (File No.
0-19244)].*
(10.34) Participation Agreement dated November 14, 1991 between
Krupp Mortgage Corporation and Krupp Government Income
Trust. [Exhibit 10.37 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991 (File No.
0-19244)].*
MOUNTAIN VIEW APARTMENTS
(10.35) Subordinated Promissory Note dated April 21, 1992 between
Mountain View Ltd. (the "Mortgagor") and Krupp Government
Income Trust (the "Holder"). [Exhibit 19.1 to Registrant's
report on Form 10-Q for the quarter ended June 30, 1992
(File No. 0-19244)].*
15
<Page>
(10.36) Agreement RE Subordinated Promissory Note dated April 21,
1992 between Krupp Government Income Trust and Krupp
Mortgage Corporation. [Exhibit 19.2 to Registrant's report
on Form 10-Q for the quarter ended June 30, 1992 (File No.
0-19244)].*
(10.37) Subordinated Multifamily Mortgage dated April 21, 1992
between Mountain View Ltd. (the "Mortgagor") and Krupp
Government Income Trust (the "Mortgagee"). [Exhibit 19.3 to
Registrant's report on Form 10-Q for the quarter ended June
30, 1992 (File No. 0-19244)].*
(10.38) Additional Loan Agreement dated April 21, 1992 between
Philip P. Mulkey, Henry V. Bragg and Gregory V. Bragg
(collectively, the "Borrowers") and Krupp Government Income
Trust (the "Holder"). [Exhibit 19.4 to Registrant's report
on Form 10-Q for the quarter ended June 30, 1992 (File No.
0-19244)].*
(10.39) Additional Loan Note dated April 21, 1992 between Philip P.
Mulkey, Henry V. Bragg and Gregory V. Bragg (collectively,
the "Borrowers") and Krupp Government Income Trust (the
"Holder"). [Exhibit 19.5 to Registrant's report on Form 10-Q
for the quarter ended June 30, 1992 (File No. 0-19244)].*
(10.40) Mortgage Note dated April 21, 1992 between Mountain View
Ltd. (the "Borrower") and Krupp Mortgage Corporation (the
"Holder"). [Exhibit 19.6 to Registrant's report on Form 10-Q
for the quarter ended June 30, 1992 (File No. 0-19244)].*
(10.41) Modification Agreement by and between Krupp Government
Income Trust and Mountain View Ltd. [Exhibit 10.1 to
Registrant's report Form 10-Q for the quarter ended
September 30, 1995 (File No. 0-19244)].*
(10.42) Second Modification Agreement by and between Krupp
Government Trust and Mountain View LTD. [Exhibit 10.1 to
Registrant's report Form 10-Q for the quarter ended June 30,
1999 (File No. 0-19244)]*
LINCOLN GREEN APARTMENTS
(10.43) Supplement to prospectus dated August 1, 1992 for Federal
National Mortgage Association pool number MX-073023.
[Exhibit 19.8 to Registrant's report on Form 10-Q for the
quarter ended September 30, 1992 (File No. 0-19244)].*
(10.44) Subordinated promissory note dated September 15, 1992 by and
between Lincoln Green Associates Limited Partnership (the
"Mortgagor") and Krupp Government Income Trust (the
"Holder"). [Exhibit 19.9 to Registrant's report on Form 10-Q
for the quarter ended September 30, 1992 (File No.
0-19244)].*
(10.45) Subordinated Multi-family Deed of Trust dated September 16,
1992 by and between Lincoln Green Associates Limited
Partnership (the "Borrower") and Krupp Government Income
Trust (the "Lender"). [Exhibit 19.10 to Registrant's report
on Form 10-Q for the quarter ended September 30, 1992 (File
No. 0-19244)].*
ROSEMONT APARTMENTS
(10.46) Participation and Servicing Agreement dated July 14, 1994,
by and between Rockport Mortgage Corporation (the
"Servicer") and Krupp Government Income Trust (the
"Participant") [Exhibit 10.87 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-19244)].*
(10.47) Deed of Trust Note dated July 1, 1994 between Rosemont Ltd.
and Rockport Mortgage Corporation. [Exhibit 10.88 to
Registrant's report on Form 10-K for the year ended December
31, 1994 (File No. 0-19244)].*
16
<Page>
(10.48) Allonge to Deed of Trust Note dated July 1, 1994 between
Rosemont Ltd. and Rockport Mortgage Corporation [Exhibit
10.89 to Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-19244)].*
(10.49) Participation Certificate with Krupp Government Income Trust
as registered owner. [Exhibit 10.96 to Registrant's report
on Form 10-K for the year ended December 31, 1995 (File No.
0-19244)].*
(99) Other:
(99.1) Chairman of the Board Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.+
(99.2) Chief Accounting Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanex-Oxley Act of 2002.+
* Incorporated by reference
+ Filed herein
17
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 7th day
of January, 2003.
KRUPP GOVERNMENT INCOME TRUST
By: /s/ Douglas Krupp
-----------------
Douglas Krupp, Chairman of Board of Trustees
and a Trustee of Krupp Government Income Trust
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 7th day of January, 2003.
SIGNATURES TITLE(S)
/s/ Douglas Krupp Chairman of Board of Trustees and a
- ---------------------------- Trustee of Krupp Government Income Trust
Douglas Krupp
/s/ Robert A. Barrows Treasurer of Krupp Government Income Trust
- ----------------------------
Robert A. Barrows
/s/ Charles N. Goldberg Trustee of Krupp Government Income Trust
- ----------------------------
Charles N. Goldberg
/s/ J. Paul Finnegan Trustee of Krupp Government Income Trust
- ----------------------------
J. Paul Finnegan
/s/ Stephen Puleo Trustee of Krupp Government Income Trust
- ----------------------------
Stephen Puleo
18
<Page>
CERTIFICATIONS
I, Douglas Krupp, certify that:
1. I have reviewed this Annual report on Form 10-K/A of Krupp Government
Income Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: January 7, 2003
/s/ Douglas Krupp
---------------------
Douglas Krupp
Chairman of the Board
19
<Page>
CERTIFICATIONS
I, Robert A. Barrows, certify that:
1. I have reviewed this annual report on Form 10-K/A of Krupp Government
Income Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: January 7, 2003
/s/ Robert A. Barrows
------------------------
Robert A. Barrows
Chief Accounting Officer
20
<Page>
APPENDIX A
KRUPP GOVERNMENT INCOME TRUST
----------
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 2001
F- 1
<Page>
KRUPP GOVERNMENT INCOME TRUST
INDEX TO FINANCIAL STATEMENTS, SCHEDULE AND SUPPLEMENTARY DATA
----------
<Table>
Report of Independent Accountants F-3
Balance Sheets at December 31, 2001 and 2000 F-4
Statements of Income and Comprehensive Income for the Years Ended December 31, 2001,
2000 and 1999 F-5
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001,
2000 and 1999 F-6
Statements of Cash Flows for the Years Ended December 31, 2001, 2000
and 1999 F-7
Notes to Financial Statements F-8 - F-19
Schedule II - Valuation and Qualifying Accounts F-20
Supplementary Data - Selected Quarterly Financial Data (Unaudited) F-21
</Table>
All other schedules are omitted as they are not applicable or not required, or
the information is provided in the financial statements or the notes thereto.
F- 2
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Trustees and the Shareholders of
Krupp Government Income Trust:
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Krupp
Government Income Trust (the "Trust") at December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedule are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2002
F- 3
<Page>
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
December 31, 2001 and 2000
----------
<Table>
<Caption>
2001 2000
------------- -------------
ASSETS
Participating Insured Mortgage Investments ("PIMIs") (Notes B, C and J):
Insured Mortgages $ 50,811,558 $ 59,752,085
Additional Loans, net of impairment provision of $1,698,811 and
$2,162,618, respectively 3,871,180 8,350,990
Participating Insured Mortgages ("PIMs")
(Notes B, D and J) 46,416,493 46,892,234
Mortgage-Backed Securities and insured
mortgage loan ("MBS") (Notes B, E and J) 14,971,348 16,536,498
------------- -------------
Total mortgage investments 116,070,579 131,531,807
Cash and cash equivalents (Notes B and J) 13,154,231 5,359,041
Interest receivable and other assets 756,832 1,082,412
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,249,229
and $6,841,714, respectively (Note B) 541,044 1,491,747
Prepaid participation servicing fees, net of
accumulated amortization of $1,999,913
and $2,112,209, respectively (Note B) 263,455 665,540
------------- -------------
Total assets $ 130,786,141 $ 140,130,547
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note B) $ 2,336,154 $ 3,550,485
Other liabilities 20,485 20,980
------------- -------------
Total liabilities 2,356,639 3,571,465
------------- -------------
Commitments (Note H)
Shareholders' equity (Notes A, F, H and K):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 127,850,874 136,114,206
Accumulated comprehensive income (Note B) 578,628 444,876
------------- -------------
Total Shareholders' equity 128,429,502 136,559,082
------------- -------------
Total liabilities and Shareholders'
equity $ 130,786,141 $ 140,130,547
============= =============
</Table>
The accompanying notes are an integral
part of the financial statements.
F- 4
<Page>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2001, 2000 and 1999
----------
<Table>
<Caption>
2001 2000 1999
-------------- ------------- ------------
Revenues:
Interest income - PIMs and PIMIs:
Basic interest $ 7,901,086 $ 8,086,930 $ 8,789,439
Additional Loan Interest 1,515,330 744,080 2,534,790
Participation interest 7,602,737 504,612 2,268,505
Interest income - MBS 1,251,710 1,375,643 1,531,351
Interest income - cash and cash
equivalents 261,513 364,803 508,144
-------------- ------------- ------------
Total revenues 18,532,376 11,076,068 15,632,229
-------------- ------------- ------------
Expenses:
Asset management fee to an affiliate (Note G) 950,966 1,007,651 1,104,431
Expense reimbursements to affiliates (Note G) 243,109 256,564 220,657
Amortization of prepaid fees and expenses (Note B) 1,352,788 1,029,734 1,672,143
General and administrative (Note G) 477,102 353,007 269,345
(Reduction of) provision for impaired mortgage
loans (Notes B and C) (463,807) - 48,272
-------------- ------------- ------------
Total expenses 2,560,158 2,646,956 3,314,848
-------------- ------------- ------------
Net income (Note I) 15,972,218 8,429,112 12,317,381
Other comprehensive income:
Net change in unrealized gain
on MBS 133,752 213,560 (641,460)
-------------- ------------- ------------
Total comprehensive income $ 16,105,970 $ 8,642,672 $ 11,675,921
============== ============= ============
Basic earnings per Share $ 1.06 $ .56 $ .82
============== ============= ============
Weighted average Shares outstanding 15,053,135 15,053,135 15,053,135
============== ============= ============
</Table>
The accompanying notes are an integral
part of the financial statements.
F- 5
<Page>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
----------
<Table>
<Caption>
Accumulated Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
-------------- ------------- ------------- --------------
Balance at December 31, 1998 $ 164,742,014 $ - $ 872,776 $ 165,614,790
Dividends (26,820,787) (12,317,381) - (39,138,168)
Net income - 12,317,381 - 12,317,381
Change in unrealized gain
on MBS - - (641,460) (641,460)
-------------- ------------- ------------ --------------
Balance at December 31, 1999 137,921,227 - 231,316 138,152,543
Dividends (1,807,021) (8,429,112) - (10,236,133)
Net income - 8,429,112 - 8,429,112
Change in unrealized gain
on MBS - - 213,560 213,560
-------------- ------------- ------------ --------------
Balance at December 31, 2000 136,114,206 - 444,876 136,559,082
Dividends (8,263,332) (15,972,218) - (24,235,550)
Net income - 15,972,218 - 15,972,218
Change in unrealized gain
on MBS - - 133,752 133,752
-------------- ------------- ------------ --------------
Balance at December 31, 2001 $ 127,850,874 $ - $ 578,628 $ 128,429,502
============== ============= ============ ==============
</Table>
Shares issued and outstanding for each of the three years ended December 31, are
15,053,135
The accompanying notes are an integral
part of the financial statements.
F- 6
<Page>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
----------
<Table>
<Caption>
2001 2000 1999
-------------- ------------- -------------
Operating activities:
Net income $ 15,972,218 $ 8,429,112 $ 12,317,381
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of (discounts) and premiums (110) (2,202) 3,044
(Reduction of) provision for impaired mortgage loans (463,807) - 48,272
Amortization of prepaid fees and expenses 1,352,788 1,029,734 1,672,143
Changes in assets and liabilities:
Decrease (increase) in interest receivable and other assets 325,580 (108,921) 83,874
Decrease in deferred income on Additional Loans (1,214,331) (367,536) (1,855,648)
Decrease in other liabilities (495) (4,045) (8,205)
-------------- ------------- -------------
Net cash provided by operating activities 15,971,843 8,976,142 12,260,861
-------------- ------------- -------------
Investing activities:
Principal collections on PIMs and Insured Mortgages 9,416,268 816,846 15,662,878
Principal collections on MBS 1,699,012 1,174,687 3,992,931
Additional Loan prepayments 4,943,617 - 2,844,600
-------------- ------------- -------------
Net cash provided by investing activities 16,058,897 1,991,533 22,500,409
-------------- ------------- -------------
Financing activity:
Dividends (24,235,550) (10,236,133) (39,138,168)
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 7,795,190 731,542 (4,376,898)
Cash and cash equivalents, beginning of year 5,359,041 4,627,499 9,004,397
-------------- ------------- -------------
Cash and cash equivalents, end of year $ 13,154,231 $ 5,359,041 $ 4,627,499
============== ============= =============
Non cash activities:
Increase (decrease) in Fair Value of MBS $ 133,752 $ 213,560 $ (641,460)
============== ============= =============
</Table>
The accompanying notes are an integral
part of the financial statements.
F- 7
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
----------
A. ORGANIZATION
Krupp Government Income Trust (the "Trust") was formed on November 1, 1989
by filing a Declaration of Trust in The Commonwealth of Massachusetts. The
Trust is authorized to sell and issue not more than 17,510,000 shares of
beneficial interest (the "Shares"). The Trust was organized for the purpose
of investing in commercial and multi-family loans and mortgage backed
securities. Berkshire Mortgage Advisors Limited Partnership ("BMALP")(the
"Advisor"), acquired 10,000 of such Shares for $200,000 and 14,999,999
Shares were sold for $299,480,263 net of purchase volume discounts of
$519,717 under a public offering which commenced on April 19, 1990 and
ended on July 15, 1991. Under the Dividend Reinvestment Plan ("DRP"),
43,136 Shares were sold for $819,356 during its public offering. The Trust
shall terminate on December 31, 2029, unless earlier terminated by the
affirmative vote of holders of a majority of the outstanding Shares
entitled to vote thereon.
B. SIGNIFICANT ACCOUNTING POLICIES
The Trust uses the following accounting policies for financial reporting
purposes:
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with accounting principles generally
accepted in the United States of America ("GAAP").
MBS
The Trust, in accordance with the Financial Accounting Standards Board's
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"), classifies its MBS portfolio as
available-for-sale. The Trust classifies its MBS portfolio as
available-for-sale as the Trust expects that a portion of the MBS portfolio
will remain after all of the PIMs and PIMIs payoff and that it will be
necessary to then sell the remaining MBS portfolio at that time in order to
close out the Trust. In addition, other situations such as liquidity needs
could arise which would necessitate the sale of a portion of the MBS
portfolio . As such, the Trust carries its MBS at fair market value and
reflects any unrealized gains (losses) as a separate component of
Shareholders' Equity. The Trust amortizes purchase premiums or discounts
over the life of the underlying mortgages using the effective interest
method.
The Federal Housing Administration ("FHA") insured mortgage is carried at
amortized cost. The Trust holds this loan at amortized cost since it is
fully insured by FHA.
PIMs AND PIMIs
The Trust accounts for its MBS portion of a PIM or PIMI investment in
accordance with FAS 115 under the classification of held to maturity as
these investments have a participation feature. As a result, the Trust
would not sell or otherwise dispose of the MBS. Accordingly, the Trust
has both the intention and ability to hold these investments to
expected maturity. The Trust carries these MBS at amortized cost.
The insured mortgage portion of the FHA PIM or FHA PIMI is carried at
amortized cost. The Trust holds these mortgages at amortized cost since
they are fully insured by FHA.
The Additional Loans are carried at amortized cost unless the Advisor of
the Trust believes there is an impairment in value, in which case a
valuation allowance is established in accordance with FAS 114 and FAS 118.
Basic interest is recognized based on the stated rate of the Department of
Housing and Urban Development ("HUD") Insured Mortgage loan (less the
servicer's fee) or the coupon rate of the Government National Mortgage
Association ("GNMA") or Fannie Mae MBS. The Trust recognizes interest
related to the participation features when the amount becomes fixed and the
transaction that gives rise to such amount is finalized, cash is
received and all contingencies are resolved. This could be the sale or
refinancing of the underlying real estate which results in a cash
payment to the Trust or a cash payment made to the Trust from surplus
cash relative to the participation feature. The Trust defers the
recognition of Additional Loan interest payments as income to the extent
these interest payments were
Continued
F- 8
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
B. SIGNIFICANT ACCOUNTING POLICIES, continued
PIMs AND PIMIs, continued
from escrows established with the proceeds of the Additional Loan. When the
properties underlying the PIMI's generate sufficient cash flow to make the
required Additional Loan interest payments and the Additional Loan value is
deemed collectible, the Trust recognizes income as earned and commences
amortization of the deferred interest amounts into income over the
remaining estimated term of the Additional Loan. During periods where
mortgage loans are impaired the Trust suspends amortizing deferred
interest.
The Trust also fully reserves the portion of any Additional Loan interest
payment satisfied through the issuance of an operating loan and any
associated interest due on such operating loan. The Trust will recognize
the income related to the operating loan when the borrower repays amounts
due under the operating loan.
IMPAIRED MORTGAGE LOANS
Impaired loans are those Additional Loans which the Advisor believes that
the collection of all amounts due in accordance with the contractual terms
of the loan agreement are not likely. Impaired loans are measured based on
the fair value of the underlying collateral net of estimated selling costs.
The Trust measures impairment on these loans quarterly. Interest received
on the impaired loans is applied against the loan principal.
CASH EQUIVALENTS
The Trust includes all short-term investments with maturities of three
months or less from the date of acquisition in cash and cash equivalents.
The Trust invests its cash primarily in agency paper and money market funds
with a commercial bank and has not experienced any loss to date on its
invested cash.
PREPAID FEES AND EXPENSES
Prepaid fees and expenses represent prepaid acquisition fees and expenses
and prepaid participation servicing fees paid for the acquisition and
servicing of PIMs and PIMIs. The Trust amortizes prepaid acquisition fees
and expenses using a method that approximates the effective interest method
over a period of ten to twelve years, which represents the estimated life
of the underlying mortgage.
The Trust amortizes prepaid participation servicing fees using a method
that approximates the effective interest method over a ten year period
beginning at final endorsement of the loan if a HUD-insured mortgage loan
or a GNMA MBS and at closing if a Fannie Mae MBS.
Upon the repayment of a PIM or PIMI any unamortized acquisition fees and
expenses and unamortized participation servicing fees related to such loan
are expensed.
INCOME TAXES
The Trust has elected to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended, and believes it will continue to meet all such
qualifications. Accordingly, the Trust will not be subject to federal
income taxes on amounts distributed to shareholders provided it distributes
annually at least 90% of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Therefore, no provision for federal
income taxes has been recorded in the financial statements.
Continued
F- 9
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
B. SIGNIFICANT ACCOUNTING POLICIES, continued
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with the GAAP
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities, contingent assets and
liabilities and revenues and expenses during the period. Significant
estimates include the net carrying value of Additional Loans and the
unrealized gains on MBS investments. Actual results could differ from those
estimates.
C. PIMIs
The Trust had investments in four PIMIs on December 31, 2001 and five PIMIs
on December 31, 2000 that provide the permanent financing of multi-family
housing. One component of a PIMI is either a securitized HUD-insured first
mortgage loan issued and guaranteed by GNMA or a sole participation
interest in a first mortgage loan originated under the FHA lending program
and insured by HUD (collectively the "Insured Mortgages"). The FHA first
mortgage or the first mortgage underlying the GNMA security provided the
borrower (generally a limited partnership) with a below market interest
rate loan in exchange for providing the Trust with participation in a
percentage of the cash generated from property operations and in a
percentage of any appreciation of the underlying property to a preferred
return, then a percentage of any appreciation thereafter. The borrower
conveys these rights to the Trust through a subordinated promissory note
and mortgage. In addition, the Trust made an Additional Loan to the owners
of the borrower to provide additional funds for the construction and
permanent financing of the property. The owners generally collateralize the
Additional Loan through a pledge and security agreement that pledges their
ownership interests in the borrower, and their share of any distributions
made from surplus cash generated by the property and the proceeds realized
upon the refinancing of the property, sale of the property or sale of the
partnership interests. Amounts payable under the Additional Loan are
neither guaranteed nor insured.
The Trust receives level monthly principal and interest ("Basic Interest")
payments amortizing over thirty to forty years, on the Insured Mortgage and
is entitled to receive participation income under the subordinated
promissory note and mortgage, and semi-annual interest payments
("Additional Loan Interest") and preferred interest under the Additional
Loan ("Preferred Interest"). The Trust receives principal and interest
payments on the Insured Mortgages currently, because these payments are
insured or guaranteed; however, there are limitations to the amount and
obligation to pay participation income, Additional Loan Interest and
Preferred Interest.
The subordinated promissory note and mortgage entitles the Trust to receive
(i) Participating Income Interest generally equal to 50% of (a) all
distributable Surplus Cash (as defined in the regulatory agreement of the
HUD-insured first mortgage) generated by the property (b) any unrestricted
cash generated from property operations and (c) to the extent available
unexpended reserves and escrows, and (ii) Participating Appreciation
Interest generally equal to 50% of the net proceeds or value of the
property upon the sale, refinancing, maturity or accelerated maturity, or
permitted prepayment of all amounts due under the Insured Mortgage and
Additional Loan less the Outstanding Indebtedness, as defined. Amounts
received by the Trust pursuant to the subordinated promissory note as
Participating Income Interest reduce amounts payable as Preferred Interest
and may reduce amounts payable as Base Interest under the Additional Loan.
The Insured Mortgage and subordinated promissory note generally have
maturities of 30 to 40 years, however, under the subordinated promissory
note the Trust can generally accelerate these maturity dates at any time
after the tenth anniversary of final endorsement for coinsurance or
insurance, but in certain cases for construction loans after the eleventh
or twelfth anniversary of initial endorsement (commencement of
construction) for coinsurance or insurance, upon giving twelve months
written notice for the payment of all accrued participation interest
through the accelerated maturity date. The Trust can accelerate the
maturity date for payment of amounts due under the subordinated promissory
note and the insured mortgage providing the contract of insurance or
coinsurance with the Secretary of HUD on the insured mortgage is canceled
prior to the accelerated maturity date.
Additional Loan Interest is payable from the following sources: (i) any
Surplus Cash received pursuant to the subordinated promissory note as
Participating Income Interest, (ii) amounts conveyed to the Trust by the
owners of the borrowing entity representing distributions of Surplus Cash
and (iii) amounts in reserve accounts established with the Additional Loan
proceeds, if available, and any interest earned on these amounts. If these
sources are not sufficient to make Additional Loan Interest payments the
owners of
Continued
F- 10
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
C. PIMIs, Continued
the borrowing entity must notify the Trust of the amount of the shortfall
and at its option the Trust could require a capital call from the owners of
the borrowing entity. The capital call would be equal to 50% of the
Additional Loan Interest shortfall and the Trust in certain situations
could convert the remaining 50% into an operating loan.
In addition to the Additional Loan Interest payments, the Additional Loan
requires the payment of Preferred Interest representing a cumulative,
non-compounded preferred return from the date of final endorsement to the
date of calculation at interest rates ranging from 9.5% to 11% per annum on
the outstanding balance of the Insured Mortgage plus the Additional Loan
and any other funds advanced by the Trust to the borrowing entity or the
owners of the borrowing entity less: (i) interest payments paid to the
Trust under the Insured Mortgage, (ii) Participating Income Interest and
(iii) Additional Loan Interest payments made under the Additional Loan.
The Insured Mortgage and subordinated promissory note generally cannot be
prepaid for a term of five years from the construction completion date or
final endorsement and thereafter may be prepaid in whole without penalty
provided all participation interest and amounts under the Insured Mortgage
are paid. Any prepayment requires not less than ninety nor more than 180
days prior written notice.
The Additional Loan generally may not be prepaid before the fifth
anniversary of the Agreement or the construction completion date and
thereafter may be prepaid in full without penalty provided Preferred
Interest and any amounts due under the Insured Mortgage and subordinated
promissory note are paid in full.
On December 31, 2001, the Trust received a prepayment of the Red Run
Additional Loan and subordinated promissory note. The Trust received
$2,900,000 of Additional Loan principal, $238,369 of Shared Appreciation
Interest, $3,506,952 of preferred interest and $67,667 of Base Interest on
the Additional Loan. In addition, the Trust recognized $702,259 of
Additional Loan interest that had been previously received and recorded in
deferred income on additional loans.
On July 23, 2001, the Trust received a prepayment of the Seasons
Subordinated Promissory Note and the Seasons Additional Loan. The Trust
received $1,924,649 of Additional Loan principal, $180,916 of surplus cash,
$847,450 of preferred interest, $1,052,455 of contingent interest, $69,129
of Base Interest on the Additional Loan and $1,299,562 which represents the
Trust's portion of the residual split. The Trust received $8,567,890
representing the principal proceeds on the first mortgage note on July 26,
2001. In addition, the Trust recognized $180,633 of Additional Loan
interest that had been previously received and recorded in deferred income
on additional loans. On August 17, 2001, the Advisor paid a special
dividend of $0.93 per share from the proceeds of the Seasons PIMI
prepayment.
The payoff of the Seasons PIMI was a result of the sale of the underlying
property by the borrower, Maryland Associates Limited Partnership ("MALP"),
which is an affiliate of the Adviser, to an affiliate of MALP's general
partner. Because the sale of the underlying property was to an affiliate,
the Independent Trustees of the Trust were required to approve the
transaction, which they did based upon a number of factors, including an
appraisal of the underlying property prepared by an independent third party
MAI appraiser. The purchase price paid by the affiliate for the underlying
property was $1.6 million greater than the value indicated by such
appraisal. Both the Trustees and the Advisor believed that the market
capitalization rate utilized in the appraisal was too high based on their
knowledge of recent sales and experience in the market and agreed that the
true fair value was the ultimate purchase price paid by the affiliate.
During the third quarter of 1999, the Trust received a prepayment of the
Audubon Villas PIMI including the Insured Mortgage with a remaining
principal balance of $14,861,957, the Additional Loan of $2,691,000 and
participation interest 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 the Audubon Villas PIMI.
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
Continued
F- 11
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
C. PIMIs, Continued
the Additional Loan and changed the Trust's participation in the Surplus
Cash generated by the 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 Additional Loan Interest. Unpaid
Additional Loan 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. As a result
of the factors described above, the Advisor determined that the Additional
Loan collateralized by the Mountain View asset was impaired and has
recorded and maintains a valuation allowance of $1,032,272.
In May 1998, the borrower on the Lifestyles PIMI defaulted on its debt
service payment on the insured first mortgage. The Trust agreed to a new
workout that runs through 2007. Under its terms, the Trust agreed to reduce
the effective interest rate on the insured first mortgage by 1.75%
retroactively for 1998 to clear the default, by 1.75% for 1999, and by 1.5%
each year thereafter until the property is sold or refinanced. An affiliate
of the Advisor refunds approximately .25% per annum to the Trust related to
the interest reduction. The borrower made a $550,000 equity contribution,
which was escrowed, for the exclusive purpose of correcting deferred
maintenance and making capital improvements to the property. The escrow has
been used up for paint, building repairs, parking lot repairs, a new
fitness facility, clubhouse remodeling and landscaping. Any Surplus Cash
that is generated by property operations will be split evenly between the
Trust and the borrower. When the property is sold or refinanced, the first
$1,100,000 of any proceeds remaining after the insured mortgage is paid off
will be split 50% / 50% between the Trust and the borrower; the next
$1,690,220 of proceeds will be split 75% to the Trust and 25% to the
borrower; and any remaining proceeds will be split 50% / 50%. The
borrower's new equity and the reduction in the effective interest rate on
the insured first mortgage have provided funds for repairs and improvements
that have helped reposition Lifestyles. As a result of the factors
described above, the Trust determined that the Additional Loan
collateralized by the Lifestyles asset was impaired, and recorded a
valuation allowance of $1,130,346 in the fourth quarter of 1998. During
2001, the Trust received $118,968 of surplus cash generated by property
operations. The Trust recognized this receipt as a reduction of principal
balance of the Additional Loan and related impairment provision. In
addition, the Trust further determined that the valuation allowance should
be reduced by an additional $344,839 based upon the current estimated fair
value of the underlying property.
At December 31, 2001 and 2000 there are no Insured Mortgage loans within
the Trust's portfolio that are delinquent as to principal or interest.
The Trust's investments in PIMIs consist of the following at December
31, 2001 and 2000:
<Table>
<Caption>
Balance Outstanding
Original Approximate At December 31,
Loan Monthly Interest Maturity -----------------------------
Insured Mortgage Amount Payments Rate Date 2001 2000
- -------------------- ------------- -------------- -------- ---------- ------------ -------------
Lifestyles (GNMA) $ 10,292,394 $ 63,000 7.000%(a) 05/01/2032 $ 9,837,873 $ 9,904,652
Windward (GNMA) 14,000,778 103,000 8.500%(b) 06/01/2032 13,434,399 13,518,840
Mountain View (FHA) 9,547,700 58,000 6.875%(c) 01/01/2034 9,208,461 9,264,428
Red Run (FHA) 19,019,600 130,000 7.875% 05/01/2034 18,330,825 18,446,243
The Seasons (FHA) 9,075,351 - - - - 8,617,922
------------- -------------- ------------ -------------
$ 61,935,823 $ 354,000 $ 50,811,558(d) $ 59,752,085
============= ============== ============ =============
</Table>
Continued
F- 12
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
C. PIMIs, Continued
<Table>
<Caption>
Base Preferred
Outstanding Balance Maturity Interest Interest
Additional Loan 2001 2000 Date Rate Rate
--------------- ------------ ------------- ---------- -------- ---------
Lifestyles(a):
Due Contractually $ 1,817,665 $ 1,817,665 05/14/2007 - -
Interest applied (118,968) -
------------ -------------
Carrying Value 1,698,697 1,817,665
Windward(b) 2,471,294 2,471,294 07/07/2002 7.5% 10%
Mountain View(c) 1,400,000 1,400,000 09/16/2003 7.0% -
Red Run - 2,900,000 - - -
The Seasons - 1,924,649 - - -
------------ -------------
$ 5,569,991(e) $ 10,513,608
============ =============
</Table>
(a) The Trust entered into an Agreement which reduced the interest rate on
the Insured Mortgage by 1.75% per annum effective January 1, 1998 for
a period of twenty-four months and by 1.5% per annum for 2000 though
2007. An affiliate of the Advisor refunds approximately .25% per annum
to the Trust related to the interest reduction. The Trust will not
receive any Additional Loan interest or Preferred Return due to the
workout, but will receive a share of any cash generated from property
operations and from proceeds of a sale or refinance.
(b) The Trust entered into an agreement which reduced the interest rate on
the Insured Mortgage by 2.0% per annum for 1997 and by 1.0% for 1998
through 2000. In addition, the Preferred Interest was reduced by 1%
and Additional Loan Interest is payable from surplus cash.
(c) The Trust entered into a second modification agreement which reduced
the interest rate on the Insured Mortgage by 1.25% per annum effective
January 1, 1999 and continuing through December 31, 2004. The
Agreement eliminated the Preferred Interest required under the
Additional Loan and changed the Trust's participation in the surplus
cash generated by the property. Furthermore, debt service relief
provided by the first modification was forgiven.
(d) The aggregate cost for federal income tax purposes is $50,811,558.
(e) The aggregate cost for federal income tax purposes is $5,688,959.
IMPAIRED ADDITIONAL LOANS
The Advisor of the Trust has determined that the Lifestyles Additional Loan is
impaired. As a result, during 1998, a valuation allowance of $1,130,346 was
established to adjust the carrying amount of the loan to the estimated fair
market value of the collateral less anticipated costs of sale. During 2001, the
Trust received $118,968 of interest on the Additional Loan which was reflected
as a reduction of the carrying amount of the loan and the valuation allowance.
In addition in the fourth quarter of 2001, the Trust further reduced the
valuation allowance by $344,839 to $666,539 based upon the current estimated
fair value of the underlying property. The Trust will continue to reflect
interest receipts as reductions to the carrying amount of the loan and the
valuation allowance until the valuation allowance is zero. The Trust did not
receive any interest payments on the Lifestyles Additional Loan during 2000 or
1999 and did not recognize any interest income during 2001, 2000 or 1999.
The Advisor of the Trust has determined that the Mountain View Additional Loan
is impaired. As a result, during 1998, a valuation allowance of $984,000 was
established to adjust the carrying amount of the loan to the then estimated fair
market value of the collateral less
Continued
F- 13
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
C. PIMIs, Continued
anticipated costs of sale. During 1999, the Trust increased the valuation
allowance of Mountain View by $48,272. The Trust will reflect interest
receipts as reductions to the carrying amount of the loan and the valuation
allowance until the valuation allowance is zero. The Trust did not receive
any interest payments or recognize any income on the Mountain View
Additional Loan during 2001, 2000 or 1999.
The activity in the valuation allowance together with the related recorded
and carrying value of the mortgage loans is as follows:
<Table>
<Caption>
Recorded Valuation Carrying
Value Allowance Value
----------- ----------- -----------
Lifestyles $ 1,698,697 $ 666,539 $ 1,032,158
Mountain View 1,400,000 1,032,272 367,728
----------- ----------- -----------
Balance at
December 31, 2001 $ 3,098,697 $ 1,698,811 $ 1,399,886
=========== =========== ===========
</Table>
The Trust also has deferred income related to Lifestyles and Mountain View of
$687,319 and $367,383, respectively.
A reconciliation of activity for each of the three years in the period ended
December 31, is as follows:
<Table>
<Caption>
2001 2000 1999
-------------- -------------- --------------
INSURED MORTGAGES
Balance at beginning of period $ 59,752,085 $ 60,129,492 $ 75,386,460
Insured Mortgage prepayments (8,575,180) - (14,861,957)
Principal collections (365,347) (377,407) (395,011)
-------------- -------------- --------------
Balance at end of period $ 50,811,558 $ 59,752,085 $ 60,129,492
============== ============== ==============
ADDITIONAL LOANS
Balance at beginning of period $ 8,350,990 $ 8,350,990 $ 11,243,862
Interest received and recognized as
Additional Loan prepayment (118,968) - -
Additional Loan prepayments (4,824,649) - (2,844,600)
Adjustment to valuation allowance 463,807 - (48,272)
-------------- -------------- --------------
Balance at end of period $ 3,871,180 $ 8,350,990 $ 8,350,990
============== ============== ==============
</Table>
PROPERTY DESCRIPTIONS:
- - Lifestyles Apartments ("Lifestyles") is a 236-unit garden style apartment
complex located in Palm Harbor, Florida.
- - Windward Lakes Apartments ("Windward") is a 276-unit garden style apartment
complex located in Pompano Beach, Florida.
- - Mountain View Apartments ("Mountain View") is a 256-unit apartment complex
located in Madison, Alabama.
- - Red Run Apartments ("Red Run") is a 304-unit apartment complex located in
Owings Mills, Maryland.
Continued
F- 14
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
D. PIMs
The Trust had investments in five PIMs at December 31, 2001 and 2000. The
Trust's PIMs consist of a GNMA or Fannie Mae MBS or a sole participation
interest in a HUD-insured first mortgage loan originated under the FHA
lending program (collectively the "Insured Mortgages"), and participation
interests in the revenue stream and appreciation of the underlying property
above specified base levels. The borrower conveys these participation
features to the Trust generally through a subordinated promissory note and
mortgage (the "Agreement").
The Trust receives guaranteed level monthly payments of principal and
interest, amortized over thirty to forty years. The GNMA and Fannie Mae MBS
are guaranteed by GNMA and Fannie Mae and HUD insures the mortgage loan
underlying the GNMA MBS and the FHA mortgage loan. The borrower usually
cannot prepay the insured mortgage during the first five years but may
prepay it thereafter subject to a 9% prepayment penalty in years six
through nine, a 1% prepayment penalty in year ten and no prepayment penalty
thereafter. The Trust may receive income related to its participation
interests in the underlying property, however, these amounts are neither
insured nor guaranteed.
Generally, the participation features consist of the following: (i)
"Minimum Additional Interest" at rates ranging from .5% to .75% per annum
calculated on the unpaid principal balance of the Insured Mortgage on the
underlying property, (ii) "Shared Income Interest" ranging from 25% to 30%
of the monthly gross rental income generated by the underlying property in
excess of a specified base, but only to the extent that it exceeds the
amount of Minimum Additional Interest received during such month, and (iii)
"Shared Appreciation Interest" ranging from 25% to 30% of any increase in
value of the underlying property in excess of a specified threshold.
Payment of participation interest from the operations of the property is
limited to 50% of net revenue or Surplus Cash as defined by Fannie Mae or
HUD, respectively. Payment of participation interest at the time of the
prepayment of the PIM or upon its maturity generally cannot exceed 50% of
any increase in value of the underlying property.
Shared Appreciation Interest is payable when one of the following occurs:
(1) the sale of the underlying property to an unrelated third party on a
date which is later than five years from the date of the Agreement, (2) the
maturity date or accelerated maturity date of the Agreement, or (3)
prepayment of amounts due under the Agreement and the Insured Mortgage.
Under the Agreement, the Trust, upon giving twelve months written notice,
can accelerate the maturity date of the Agreement to a date not earlier
than ten years from the date of the Agreement for (a) the payment of all
participation interest due under the Agreement as of the accelerated
maturity date, or (b) the payment of all participation interest due under
the Agreement plus all amounts due on the first mortgage note on the
property.
At December 31, 2001 and 2000 there are no Insured Mortgage loans within
the Trust's portfolio that are delinquent of principal or interest.
Continued
F- 15
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
D. PIMs, continued
The Trust's PIMs consisted of the following at December 31, 2001 and 2000:
<Table>
<Caption>
Original Approximate Balance Outstanding At December 31,
Loan Monthly Interest Maturity ----------------------------------
PIM Amount Payments Rate Date 2001 2000
- --- ------------- -------------- -------- ---------- ------------ ------------
River View (GNMA) $ 9,284,877 $ 64,500 8.000% 01/15/2033 $ 8,905,107 $ 8,964,717
Mill Pond (FHA) 7,812,100 55,200 8.150% 01/01/2033 7,484,720 7,534,451
Waterford (FHA) 6,935,900 48,800 8.125% 08/01/2032 6,625,742 6,671,434
Rivergreens (FHA) 10,003,000 69,500 8.005% 04/01/2033 9,588,286 9,652,263
Lincoln Green (FNMA) 15,565,000 100,000 6.750% 10/01/2002(a) 13,812,638 14,069,369
------------- -------------- ------------ ------------
Total $ 49,600,877 $ 338,000 $ 46,416,493(b) $ 46,892,234
============= ============== ============ ============
</Table>
(a) Normal monthly benefit is based on a 30-year amortization. All unpaid
principal of approximately $13,583,000 and accrued interest is due at the
maturity date.
(b) The aggregate cost for federal income tax purposes is $46,416,493.
A reconciliation of activity for each of the three years in the period
ended December 31, is as follows:
<Table>
<Caption>
2001 2000 1999
------------- ------------- -------------
Balance at beginning of period $ 46,892,234 $ 47,331,673 $ 47,737,583
Principal collections (475,741) (439,439) (405,910)
------------- ------------- -------------
Balance at end of period $ 46,416,493 $ 46,892,234 $ 47,331,673
============= ============= =============
</Table>
PROPERTY DESCRIPTIONS:
- River View Apartments ("River View") is a 220-unit apartment complex
located in Columbia, South Carolina.
- Mill Pond Apartments ("Mill Pond") is a 146-unit apartment complex in
Bellbrook, Ohio.
- Waterford Townhomes Apartments ("Waterford") is a 122-unit apartment
complex in Eagen, Minnesota.
- Rivergreens Apartments ("Rivergreens") is a 208-unit apartment complex in
Gladstone, Oregon.
- Lincoln Green Apartments ("Lincoln Green") is a 616-unit apartment complex
in Greensboro, North Carolina.
Continued
F- 16
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
E. MBS
At December 31, 2001, the Trust's MBS portfolio had an amortized cost of
$9,546,823 and gross unrealized gains of $578,628, respectively. At
December 31, 2001, the Trust had a FHA insured mortgage loan with an
amortized cost of $4,845,897 and gross unrealized gains of $327,232. At
December 31, 2000, the Trust's MBS portfolio had an amortized cost of
$11,224,277 and gross unrealized gains and losses of $445,617 and $741,
respectively. At December 31, 2000, the Trust's FHA insured mortgage loan
had an amortized cost of $4,867,345 and a gross unrealized gain of
$200,271. The Trust's MBS have maturities ranging from 2008 to 2035.
<Table>
<Caption>
Unrealized
Maturity Date Fair Value Gain/(loss)
------------- ------------- -------------
2002 - 2006 $ - $ -
2007 - 2011 102,831 1,915
2012 - 2035 15,195,749 903,945
------------- -------------
Total $ 15,298,580 $ 905,860
============= =============
</Table>
F. SHAREHOLDERS' EQUITY
Under the Declaration of Trust and commencing with the initial closing of
the public offering of shares, the Trust has declared and paid dividends on
a quarterly basis. During the period in which the Trust qualifies as a
REIT, the Trust has and will pay quarterly dividends aggregating at least
95% of taxable income on an annual basis to be allocated to the
shareholders in proportion to their respective number of shares.
In order for the Trust to maintain its REIT status with respect to the
requirements of Share ownership, the Declaration of Trust prohibits any
investor from owning, directly or indirectly, more than 9.8% of the
outstanding Shares and empowers the Trustees to refuse to permit any
transfer of Shares which, in their opinion, would jeopardize the status of
the Trust as a REIT.
G. RELATED PARTY TRANSACTIONS
Under the terms of the Advisory Service Agreement, the Advisor receives an
Asset Management Fee equal to .75% per annum of the value of the Trust's
actual and committed invested assets payable quarterly.
The Trust also reimburses affiliates of the Advisor for certain costs
incurred in connection with maintaining the books and records of the Trust,
the preparation and mailing of financial reports, tax information and other
communications to investors and legal fees and expenses. Included in the
general and administrative expenses are legal fees and expenses paid by the
Trust to an affiliate of $12,033, $3,305 and $1,285, for the years ended
December 31, 2001, 2000 and 1999, respectively.
During the three years ended December 31, 2001, 2000 and 1999, the Trust
received interest collections on Additional Loans with affiliates of the
Advisor of the Trust of $155,738, $173,544 and $225,156, respectively. In
addition, the Trust received $3,431,133 in 2001, $174,505 in 2000 and
$153,499 in 1999 related to Participating Interest Income.
As discussed in Note C, the Trust received a prepayment of the Seasons PIMI
as a result of a sale of the property to an affiliate.
H. ORIGINAL SHARES
Upon termination of the Trust, an affiliate of the Advisor is committed to
pay to holders of Original Shares the amount (if any) by which (a) the
Shareholders' Original Investments exceed (b) all Dividends (as defined in
the prospectus) paid by the Trust with respect to such Original Shares.
Original Shares are those Shares purchased during the Trust's initial
public offering either through purchase or through the dividend
reinvestment program and held until the last mortgage held by the Trust is
repaid or disposed of.
Continued
F- 17
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
I. FEDERAL INCOME TAXES
<Table>
Net income per statement of income $ 15,972,218
Less: Book to tax difference for Additional Loan
interest income (1,297,027)
Less: Reduction of provision for impaired mortgage loans (344,839)
Less: Book to tax difference for amortization
of prepaid fees and expenses (648,593)
------------
Net income for federal income tax purposes $ 13,681,759
============
</Table>
The Trust paid dividends of $1.61 per share during 2001 which represents
approximately $0.91 from ordinary income and $0.70 represents a non-taxable
distribution for federal income tax purposes.
The basis of the Trust's assets for financial reporting purposes is less
than its tax basis by approximately $7,021,000 and $8,209,000 at December
31, 2001 and 2000, respectively. The basis of the Trust's liabilities for
financial reporting purposes exceeded its tax basis by approximately
$2,314,000 and $3,550,000 at December 31, 2001 and 2000, respectively.
J. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The Trust uses the following methods and assumptions to estimate the fair
value of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those instruments.
MBS
The Trust estimates the fair value of MBS based on quoted market prices
while it estimates the fair value of insured mortgages based on quoted
prices of MBS with similar interest rates. Based on the estimated fair
value determined using these methods and assumptions the Trust's
investments in MBS had gross unrealized gains of approximately $906,000 at
December 31, 2001 and gross unrealized gains and losses of approximately
$646,000 and $1,000 at December 31, 2000.
PIMs AND PIMIs
There is no active trading market for these investments. Accordingly,
management estimates the fair value of the PIMs and the insured mortgage
portion of the PIMIs using quoted market prices of MBS having the same
stated coupon rate as the Insured Mortgages. Additional Loans are based on
the estimated fair value of the underlying properties as an estimate of the
fair value of the loan is not practicable. Management does not include any
participation income in the Trust's estimated fair values, as Management
does not believe it can predict the time of realization of the feature with
any certainty. Based on the estimated fair value determined using these
methods and assumptions, the Trust's investments in PIMs and PIMIs had
gross unrealized gains of approximately $2,403,000 at December 31, 2001 and
gross unrealized gains and losses of approximately $343,000 and $1,738,000,
respectively at December 31, 2000.
Continued
F- 18
<Page>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------
J. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS, continued
At December 31, 2001 and 2000, the Trust estimated the fair value of its
financial instruments as follows:
<Table>
<Caption>
(amounts in thousands)
2001 2000
------------------------ ------------------------
Fair Carrying Fair Carrying
Value Value Value Value
---------- --------- ---------- ----------
Cash and cash equivalents $ 13,154 $ 13,154 $ 5,359 $ 5,359
MBS 15,299 14,971 16,737 16,536
PIMs and PIMIs:
PIMs 47,803 46,416 46,594 46,892
Insured mortgages 51,828 50,812 58,655 59,752
Additional Loans 3,871 3,871 8,351 8,351
---------- --------- ---------- ----------
$ 131,955 $ 129,224 $ 135,696 $ 136,890
========== ========= ========== ==========
</Table>
K. SUBSEQUENT EVENTS
On January 3, 2002, the Trust received $18,330,825 representing the
principal proceeds on the first mortgage note from the Red Run PIMI. The
Advisor declared a special dividend of $1.68 per share from the proceeds of
the Red Run PIMI prepayment which was paid on January 16, 2002.
On January 2, 2002, the Trust received a prepayment of the Waterford
Apartments Subordinate Promissory note. The Trust received $379,725 of
Minimum Additional Interest and $425,643 of Shared Appreciation Interest.
On January 17, 2002, the Trust received $6,625,742 representing the
principal proceeds on the first mortgage. In addition, the Trust received a
prepayment premium of $66,257 from the payoff. The Advisor has declared a
special dividend of $0.51 per share from the proceeds of the Waterford
Apartments PIM prepayment which will be paid in the first quarter of 2002.
F- 19
<Page>
KRUPP GOVERNMENT INCOME TRUST
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
----------
2001
<Table>
<Caption>
Balance at Charged to Balance at
beginning costs and end of
Description of Period Expenses Recoveries Period
- ----------- ----------- ----------- ----------- -----------
Additional Loan
impairment provision $ 2,162,618 $ - $ (463,807) $ 1,698,811
=========== =========== =========== ===========
</Table>
2000
<Table>
<Caption>
Balance at Charged to Balance at
beginning costs and end of
Description of Period Expenses Recoveries Period
- ----------- ----------- ----------- ----------- -----------
Additional Loan
impairment provision $ 2,162,618 $ - $ - $ 2,162,618
=========== =========== =========== ===========
</Table>
1999
<Table>
<Caption>
Balance at Charged to Balance at
beginning costs and end of
Description of Period Expenses Recoveries Period
- ----------- ----------- ----------- ----------- -----------
Additional Loan
impairment provision $ 2,114,346 $ 48,272 $ - $ 2,162,618
=========== =========== =========== ===========
</Table>
F- 20
<Page>
KRUPP GOVERNMENT INCOME TRUST
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
<Table>
<Caption>
For the Quarter Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
----------- ------------ ------------- ------------
Total revenues $ 2,795,745 $ 2,731,138 $ 6,059,462 $ 6,946,031
=========== ============ =========== ===========
Net income $ 2,140,379 $ 2,045,187 $ 5,360,536 $ 6,426,116
=========== ============ =========== ===========
Earnings per Share $ .14 $ .14 $ .35 $ .43
=========== ============ =========== ===========
<Caption>
For the Quarter Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
----------- ------------ ------------- ------------
Total revenues $ 2,657,314 $ 2,660,457 $ 2,697,284 $ 3,061,013
=========== ============ =========== ===========
Net income $ 2,027,459 $ 1,964,868 $ 1,986,007 $ 2,450,778
=========== ============ =========== ===========
Earnings per Share $ .13 $ .14 $ .13 $ .16
=========== ============ =========== ===========
</Table>
F- 21