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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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
(Exact name of registrant as specified in its charter)
Massachusetts 04-3089272
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
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 continued, 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. |_|
SEC 1673 (11-03) Persons who respond to the collection of information contained
in this form are not required to respond unless the form
displays a currently valid OMB control number.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 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 16 - 17
-1-
PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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 the Shares 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 remaining PIMI investment consists of (1) an insured mortgage loan
originated under the lending program of the Federal Housing Administration
("FHA") insured as to principal and basic interest, (2) an additional loan
("Additional Loan") to the borrower or owners of the borrower in excess of
mortgage amounts insured or guaranteed under the FHA program that increases the
Trust's total financing with respect to that property and (3) a participating
mortgage. The Additional Loan associated with the insured mortgage originated in
connection with a Department of Housing and Urban Development ("HUD") insured
program cannot, under government regulations, be collateralized by a mortgage on
the underlying property. The Additional Loan is collateralized by a security
interest satisfactory to Berkshire Mortgage Advisors Limited Partnership (the
"Advisor"). The Additional Loan is neither insured nor guaranteed. In addition,
the participation feature related to the participating mortgage is neither
insured nor guaranteed. The Additional Loan may 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 mortgage
loans issued or originated by GNMA, Fannie Mae or 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.
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 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.
-2-
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
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 materially adversely
affected the Trust's operations, and the Trust anticipates no material 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, 2003, no personnel were 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.
-3-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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, 2003 is approximately
6,600.
The Trust has declared and paid dividends on a quarterly basis and intends to do
so for the foreseeable future. The Trustees established a dividend rate per
Share per quarter of $0.02 per Share per quarter for the third and fourth
quarter of 2003, $0.06 for the first and second quarter of 2003 and $0.17 for
each quarter of 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.
(Amounts in thousands, except for per Share amounts)
2003 2002 2001 2000 1999
-------- -------- --------- --------- ---------
Total revenues $ 6,417 $ 9,011 $ 18,532 $ 11,076 $ 15,632
Net income $ 5,414 $ 7,782 $ 15,972 $ 8,429 $ 12,317
Net income per Share $ 0.36 $ 0.52 $ 1.06 $ 0.56 $ 0.82
Weighted average Shares outstanding 15,053 15,053 15,053 15,053 15,053
Total assets at December 31 $ 12,800 $ 62,521 $ 130,786 $ 140,131 $ 142,096
Average dividends per Share $ 3.58 $ 4.98 $ 1.61 $ 0.68 $ 2.60
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, 2003, the Trust had liquidity, consisting of cash and cash
equivalents of approximately $1.6 million as well as the cash inflows provided
by the remaining PIMI, MBS and cash and cash equivalents. The Trust may also
receive additional cash flow from the participation features of its remaining
PIMI. 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 demands on the Trust's liquidity are quarterly dividends
paid to investors of approximately $300,000, which represents the current
quarterly dividend rate of $0.02 per share. Funds for dividends come from
interest income received on the remaining PIMI, MBS and cash and cash
equivalents, net of operating expenses, and the principal collections received
on the remaining PIMI and MBS. The portion of dividends funded from principal
collections and cash reserves reduces the capital
-4-
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 $0.02 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 Advisor 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 from the insured first mortgage, the Trust's investment in the
remaining PIMI also may provide additional income through the interest on the
Additional Loan portion of the PIMI as well as participation interest based on
operating cash flow and an increase in the value realized upon the sale or
refinance of the underlying property. However, collection of the Additional Loan
principal and interest from the participation feature is neither guaranteed nor
insured and depends upon the successful operation of the underlying property.
On July 15, 2003, the Trust received a prepayment of the Pointe East Apartments
insured mortgage for $3,251,119. The Trust also received a prepayment premium of
$130,045 from this payoff. On August 4, 2003, the Trust paid a special dividend
of $0.23 per share from the proceeds of the Pointe East Apartments insured
mortgage payoff.
On May 30, 2003, the Trust received a prepayment of the Windward Lakes
Apartments Subordinated Promissory Note and the Windward Lakes Apartments
Additional Loan. The Trust received $2,471,294 of Additional Loan principal,
$970,575 of Additional Loan interest, $719,682 of Shared Appreciation Interest
and $684,291 of accrued interest from the workout agreement that expired in
2000. On June 16, 2003, the Trust received $13,301,440 in principal proceeds on
the first mortgage note. In addition, the Trust recognized $373,757 of
Additional Loan interest that had been previously received and recorded as
deferred income on the Additional Loan. On July 24, 2003, the Trust paid a
special dividend of $1.22 per share from the proceeds of the Windward Lakes
prepayment.
On March 27, 2003, the Trust received a prepayment of the Rivergreens Apartments
Subordinated Promissory Note. The Trust received $547,978 of Shared Appreciation
Interest and $383,297 of Minimum Additional Interest. On April 10, 2003, the
Trust received $9,500,670 representing the principal proceeds on the first
mortgage loan from the Rivergreens Apartments PIM. On May 9, 2003, the Trust
paid a special dividend of $0.70 per share from the proceeds of the Rivergreens
Apartments PIM prepayment.
On March 12, 2003, the Trust sold the Lifestyles Ginnie Mae MBS at par for
$9,746,038 to the borrower of the Lifestyles PIMI. Concurrently, the borrower
paid off the full amount due on the Additional Loan of $1,817,665. In addition,
the Trust recognized $343,659 of Additional Loan interest previously recorded as
deferred income on the Additional Loan. On May 7, 2003, the Trust paid a special
dividend of $0.77 per share from the proceeds of the Lifestyles Apartments PIMI.
On January 21, 2003, the Trust received a prepayment of the Mill Pond I PIM for
$7,430,727 representing the principal proceeds on the first mortgage. The
underlying property value did not increase sufficiently to meet the criteria for
the Trust to earn any participating interest. On May 5, 2003, the Trust paid a
special dividend of $0.50 per share from the proceeds of the Mill Pond I PIM.
Due to the significant number of prepayments of mortgage investments in 2003,
the Trust saw a decrease in its overall mortgage investments of approximately
82% during 2003. In addition, due to the cumulative prepayments since inception
through December 31, 2003, the Trust has approximately 4% of its original
mortgage investments remaining.
On August 27, 2002, the Trust received $4,856,759 representing the principal
proceeds on the first mortgage loan from the Rosemont Apartments MBS. In
addition, the Trust received a prepayment premium of $194,270 from this payoff.
On September 12, 2002, the Trust paid a special dividend of $0.34 per share from
the proceeds of the Rosemont Apartments MBS prepayment.
On July 25, 2002, the Trust received $13,676,641 representing the principal
proceeds on the first mortgage loan from the Lincoln Green Apartments PIM. On
June 28, 2002, the Trust received a prepayment of the Lincoln Green Apartments
Subordinated Promissory Note. The Trust received $725,000 of Shared Appreciation
Interest and $278,785 of Shared Income Interest and Minimum Additional Interest.
On August 28, 2002, the Trust paid a special dividend of $0.99 per share from
the proceeds of the Lincoln Green Apartments PIM prepayment
On May 15, 2002, the Trust received $8,884,123 representing the principal
proceeds on the first mortgage loan from the River View Apartments PIM. In
addition, the Trust received a prepayment premium of $88,841 from the payoff. On
June 4, 2002, the Trust paid a special dividend of $0.61 per share from the
proceeds of the River View Apartments PIM prepayment.
-5-
On May 15, 2002, the Trust received $2,487,447 representing the principal
proceeds on the first mortgage loan from the Parkwest Apartments MBS. In
addition, the Trust received a prepayment premium of $49,749 from this payoff.
On June 19, 2002, the Trust paid a special dividend of $0.17 per share from the
proceeds of the Parkwest Apartments MBS prepayment.
On January 3, 2002, the Trust received $18,330,825 representing the principal
proceeds on the first mortgage loan from the Red Run PIMI plus $120,296 of
interest on the first mortgage loan. 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. On January 16, 2002, the Trust paid a special
dividend of $1.68 per share from the proceeds of the Red Run PIMI prepayment.
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 loan. In addition, the Trust received a prepayment premium of $66,257
from the payoff. On March 1, 2002, the Trust paid a special dividend of $0.51
per share from the proceeds of the Waterford Apartments PIM prepayment.
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 negotiated purchase price paid by the affiliate.
The remaining PIMI investment, Mountain View, operates under a workout
agreement, its second workout with the Trust. The Mountain View agreement
modified the borrower's obligation to make Additional Loan interest payments,
regardless of whether the property generates sufficient revenues to do so, to an
obligation to pay Additional Loan interest only if the property generates
Surplus Cash, as defined by HUD. For the underlying property's fiscal years
ending December 31, 2003 and 2002, Mountain View did not generate any Surplus
Cash.
Mountain View has experienced problems due to competitive market conditions. In
June 1999, the Trust approved a second workout of Mountain View. 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
2004, and to change the loan's 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 and its application
towards Additional Loan interest. 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.
The Mountain View Additional Loan was scheduled to mature in September 2003.
When the trust entered into the second workout agreement in June 1999, it was
the Trust's intention to extend the maturity date of the Additional Loan to
coincide with the expiration date of the interest rebate in December 2004. While
reviewing the existing Additional Loan Agreement, the Advisor noted that the
maturity date of the Additional Loan was not updated at the time of the second
workout agreement. On September 8, 2003, the Advisor entered into a third
modification with the borrower to extend the maturity date to December 31, 2004
to correct this oversight.
Under the restructuring described above, management determined that the new
interest rate level of the loan was at or above the then prevailing rate for
similar instruments and therefore did not meet the criteria for a troubled debt
restructuring. Accordingly, the restructuring and new rate was accounted for
prospectively and not as a troubled debt restructuring.
-6-
During 2002 and 2003, operating results at Mountain View have continued to
deteriorate. A building with 20 three-bedroom apartments was out of service for
18 months as a result of a fire in 2001. Reconstruction work necessitated by the
fire was completed in mid-2002, with insurance proceeds covering the total cost
of the restoration and a portion of the rental income. Additionally, occupancy
in the remaining units has been affected by local economic conditions. These
factors have made the rental market much more competitive for apartment owners,
and the use of concessions to attract potential renters has increased throughout
the market. Consequently, rental income decreased in 2002 and did not improve in
2003. Additionally, both insurance costs and real estate taxes have increased
significantly, which have further deteriorated operating results. As a result of
the factors described above, the Trust maintains a valuation allowance for the
Mountain View of $1,032,617. Between the valuation allowance and the related
deferred income on Additional Loans liability account, the Mountain View
additional loan has been effectively fully reserved.
Whether the operating performance of Mountain View provides sufficient cash flow
from operations to pay either the Additional Loan principal and interest or
participation income will depend on factors that the Trust has little or no
control over. Should the property be unable to generate sufficient cash flow to
pay the Additional Loan interest, it would reduce the Trust's distributable cash
flow and continue to negatively affect the value of the Additional Loan
collateral.
There are no contractual restrictions on the repayment of the remaining PIMI.
The participation feature and Additional Loan are neither insured nor
guaranteed. If the prepayment of the 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.
In the event that the Mountain View PIMI pays off, the Trust would then commence
an orderly liquidation of the remaining assets of the Trust and subsequently pay
a liquidation dividend.
In the event that the remaining PIMI does not pay off as discussed above, the
Trust does have the option to call this PIMI by accelerating the maturity. If
the call feature is exercised then the insurance feature of the loan would be
canceled. Therefore, the Advisor will determine the merits of exercising the
call option for the remaining 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 to revenue recognition related
to the Trust's remaining PIMI investment, impaired mortgage loan, amortization
of Prepaid Fees and Expenses and the carrying value of its MBS. The Trust's
policies are as follows:
The Trust accounted for its MBS portion of a PIM or PIMI investment in
accordance with the Financial Accounting Standards Board's Statement 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("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 had both the intention and ability to
hold these investments to expected maturity. The Trust carried 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 "Accounting by Creditors for Impairment of a Loan" and FAS 118
"Accounting by Creditors for Impairment of a Loan- Income Recognition and
Disclosures". The Trust, in accordance with FAS 115, classifies its MBS
portfolio as available-for-sale. The Trust classifies its MBS portfolio as
available-for-sale as a portion of the MBS portfolio may 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.
Basic interest is recognized based on the stated rate of the HUD insured
mortgage loan (less the servicer's fee) or the coupon rate of the GNMA 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.
-7-
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 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 using the most current operating
information available. Interest received on the impaired loans is applied
against the loan principal.
Prepaid fees and expenses represented prepaid acquisition fees and expenses and
prepaid participation servicing fees paid for the acquisition and servicing of
PIMs and PIMIs. The Trust amortized prepaid acquisition fees and expenses using
a method that approximated the effective interest method over a period of ten to
twelve years, which represents the estimated life of the underlying mortgage.
The Trust amortized prepaid participation servicing fees using a method that
approximated 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. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Trust's investments in its remaining insured mortgage 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 and both have significant experience in mortgage
securitizations. In addition, their MBS 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 Loan and interest on
the participation features have risks similar to 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 affected by adverse changes in general economic conditions, 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.
At December 31, 2003, the Trust's investments also include cash and cash
equivalents of approximately $1.4 million of Agency paper, which is issued by
Government Sponsored Enterprises with a credit rating equal to the top rating
category of a nationally recognized statistical rating organization.
Interest Rate Risk
The Trust's primary market risk exposure is to interest rate risk, which can be
defined as the exposure of the Trust's net income, comprehensive income or
financial condition to adverse movements in interest rates. At December 31,
2003, the Trust's remaining PIMI and MBS comprise the majority of the Trust's
assets. Decreases in interest rates may accelerate the prepayment of the Trust's
investments. Increases in interest rates may decrease the proceeds from a sale
of the MBS. The Trust does not utilize any derivatives or other instruments to
manage this risk as the Trust plans to hold its remaining PIMI investment to
expected maturity while it is expected that substantially all of the MBS will
prepay over the same time period thereby mitigating any potential interest rate
risk to the disposition value for any remaining MBS.
The Trust monitors prepayments and considers prepayment trends, as well as
dividend requirements of the Trust, when setting regular dividend policy. For
MBS, the fund forecasts prepayments based on trends in similar securities as
reported by statistical reporting entities such as Bloomberg. For its remaining
PIMI investment, the Trust incorporates prepayment assumptions into planning as
the property notifies the Trust of the intent to prepay or as it matures.
The table below provides information about the Trust's financial instruments
that are sensitive to changes in interest rates. For
-8-
mortgage investments, the table presents principal cash flows and related
weighted average interest rates ("WAIR") by expected maturity dates. The
expected maturity date is contractual maturity adjusted for expectations of
prepayments.
Expected maturity dates ($ in thousands)
---------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
Face Fair
Value Value (1)
---------------------------------------------------------------------------------
Interest-sensitive assets:
MBS $ 1,538 $ -- $ -- $ -- $ -- $ -- $ 1,538 $ 1,642
WAIR 8.54% 8.54
PIMIS 9,082 -- -- -- -- -- 9,082 9,082
WAIR 6.88% 6.88%
Additional Loans 1,400 -- -- -- -- -- 1,400 --
WAIR 7.00% 7.00%
------- ------- ------- ------- ------- ------- ------- -------
Total Interest-
Sensitive Assets $12,020 $ -- $ -- $ -- $ -- $ -- $12,020 $10,724
======= ======= ======= ======= ======= ======= ======= =======
(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 PIMI investments.
Also included in the Trust's assets are cash and cash equivalents. Due to the
short-term maturity of these investments generally less than three months, the
Trust is not exposed to significant interest rate risk on these investments.
-9-
Operations
The following discussion relates to the operations of the Trust during the years
ended December 31, 2003, 2002 and 2001. Dollars are stated in thousands, except
Share amounts.
Years Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Amount Amount Amount
------ ------ ------
Interest income on PIMs
and PIMIs:
Basic interest $ 2,099 $ 4,531 $ 7,901
Additional Loan interest 1,955 984 1,515
Participation interest 1,794 2,027 7,603
Interest income on MBS 453 1,238 1,251
Interest income on cash
and cash equivalents 116 230 262
Trust expenses (894) (1,199) (1,671)
Amortization of prepaid fees and expenses (109) (696) (1,353)
Reduction of provision for impaired
Additional Loans -- 667 464
----------- ----------- -----------
Net income $ 5,414 $ 7,782 $ 15,972
=========== =========== ===========
Weighted average
Shares outstanding 15,053,135 15,053,135 15,053,135
=========== =========== ===========
The Trust's net income decreased in 2003 when compared to 2002 due primarily to
decreases in basic interest income on PIMs and PIMIs, participation interest and
interest income on MBS and an increase in expense reimbursement to affiliates.
This decrease is partially offset by an increase in Additional Loan interest and
decreases in asset management fees, amortization expense and the provision for
impaired mortgage loans. Basic interest income on PIMs and PIMIs decreased due
primarily to the payoffs of the Rivergreen Apartments and the Mill Pond I
Apartments PIMs in 2003, the payoffs of the River View and Lincoln Green PIMs in
2002 and the payoffs of the Windward Lakes and the Lifestyles PIMIs in 2003. The
decrease in basic interest income on PIMs and PIMIs was partially offset by
accrued interest received from the Windward Lakes payoff in relation to the
workout agreement. Participation interest decreased due to the collections from
the Windward Lakes, Lifestyles and Rivergreen Apartments payoffs in 2003 being
less than the collections received from the Lincoln Green, River View and
Waterford payoffs in 2002. Interest income on MBS decreased due primarily to the
payoff of the Pointe East Apartments MBS in 2003 and the payoffs of the Rosemont
Apartments and Parkwest Apartments MBS in 2002. The decrease in interest income
on MBS is partially offset by the prepayment premium received from the Pointe
East payoff. Expense reimbursement of affiliates increased primarily due to a
change in the estimated cost of services provided to the Trust in 2002 that was
paid in 2003 and an increase in the cost of 2003's services associated with the
wind down of the Trust's activities and the expected liquidation of the Trust's
assets.
Additional Loan interest increased due to the collection of base interest and
the recognition of deferred revenue from the payoff of the Windward Lakes PIMI
in 2003. Asset management fees decreased due to the decline in the Trust's asset
base as a result of principal collections and prepayments. Amortization expense
decreased due primarily to the River View, Waterford and Lincoln Green PIM
payoffs in 2002, the Rivergreen Apartments PIM payoff in 2003 and the full
recognition of prepaid fees and expenses for the Mountain View PIMI and the Mill
Pond I PIM in 2003 and the Lifestyles and Windward Lakes PIMIs in 2002. The
provision for impaired mortgage loans decreased due to the reversal of the
Lifestyles valuation allowance at the end of 2002 based upon the expected payoff
of the loan in March of 2003.
The Trust's net income decreased in 2002 when compared to 2001 due primarily to
decreases in basic interest income on PIMs and PIMIs, additional loan interest
and participation interest net of decreases in asset management fees and
amortization expense. Basic interest income on PIMs and PIMIs decreased due to
payoffs of the Lincoln Green Apartments, Waterford Apartments, and the River
View Apartments PIMs and the Red Run PIMI in 2002 and the Seasons PIMI in 2001.
Additional loan interest decreased due to the payoff of the Red Run PIMI in 2002
and the Seasons PIMI in 2001 net of the recognition of deferred revenue from the
Windward Lakes PIMI beginning in 2002. Participation income was greater in 2001
due to the amount received from payoffs in 2001 when compared to the amount
received from payoffs in 2002. Asset management fees decreased due to the
decline in the Trust's asset base as a result of principal collections and
prepayments. Amortization expense decreased due to the full recognition of
prepaid fees and expenses associated with the Lincoln Green Apartments PIM,
Riverview Apartments PIM, Waterford Apartments PIM and the Red Run PIMI payoffs
and the full recognition of prepaid fees
-10-
and expenses associated with the Life Styles and Windward Lakes PIMIs and the
full recognition of acquisition costs associated with the Mill Pond and
Rivergreens PIMs.
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.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this Annual Report on Form 10-K, the
Chief Executive Officer and Chief Accounting Officer carried out an evaluation
of the effectiveness of the design and operation of the Trust's disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and the Chief Accounting Officer concluded that the Trust's disclosure controls
and procedures were effective as of the date of their evaluation in timely
alerting them to material information relating to the Trust required to be
included in this Annual Report on Form 10-K.
(b) Changes in Internal Controls
There were no significant changes in the Trust's internal controls or in other
factors that could significantly affect such internal controls subsequent to the
date of the evaluation described in paragraph (a) above.
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:
Position with Krupp Date of Term
Name and Age Government Income Trust Election Expires
------------ ----------------------- -------- -------
Douglas Krupp (57) Chairman of Board of Trustees and Trustee May, 1996 May 2004
* Charles N. Goldberg (62) Trustee March, 1990 May 2004
* J. Paul Finnegan (79) Trustee March, 1990 May 2004
* Stephen Puleo (69) Trustee February, 2001 May 2004
Peter F. Donovan (50) Chief Executive Officer July, 2003 N/A
Alan Reese (50) Treasurer February, 2003 N/A
Scott D. Spelfogel (43) Clerk July, 1990 N/A
MaryBeth Bloom (30) Assistant Clerk November, 2000 N/A
* 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 one operating company 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 also
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
-11-
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, 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.
Peter F. Donovan 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 12th largest in the United States based on servicing and asset management
of an $18.3 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.
Alan Reese is the Executive Vice President, Corporate Operations and Chief
Financial Officer of Berkshire Mortgage Finance. Mr. Reese joined Berkshire
Mortgage Finance in February of 2003 and is currently responsible for the
accounting, financial planning and reporting, treasury, mortgage trading desk
and loan servicing functions. Prior to joining Berkshire Mortgage Finance, Mr.
Reese was the Chief Financial Officer of Visible Markets, Inc. from 2000 to 2001
and was engaged in business as a consultant from 2001-January, 2003. Prior to
Visible Markets, Inc., he was the Senior Vice President and Chief Financial
Officer of Mortgage Lenders Network USA, Inc. from 1998-2000. Mr. Reese held
several positions with BankBoston Corporation from 1990 to 1998 and most
recently held the position of Director of Operations, National Consumer Lending
from 1996-1998. In addition, Mr. Reese was employed with Coopers & Lybrand from
1976 to 1990, and was a partner from 1987-1990. Mr. Reese presently serves on
the Board of Trustees for Berklee College of Music. He received a B.B.A. degree
from the University of Wisconsin - Eau Claire 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 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 59) 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 one
operating company 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 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.
-12-
Ronald Halpern (age 62) 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 54) is Senior Vice President for Loan Management of
Berkshire Mortgage Finance and in this capacity, she is responsible for the
Asset Management functions of Berkshire Mortgage Finance. She manages the
estimated $18.3 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 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 21, 2004, the following were 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 held by the Advisor.
The amounts and percentages of Shares beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under these rules, a person is deemed to be a
beneficial owner of a security if that person has or shares voting power, which
includes the power to vote or to direct the voting of such security, or
investment power, which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Under these rules, more than one person may be deemed
to be a beneficial owner of the same securities.
Class of Name of Beneficial Amount and Nature of Percent
Stock Owner Beneficial Interest of Class
----- ----- ------------------- --------
Shares of Berkshire Income Realty - OP, L.P. ("BIR - OP") 4,630,792 Shares (1) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
Shares of Berkshire Income Realty, Inc. ("BIR") 4,630,792 Shares (1)(a) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
Shares of BIR GP, L.L.C. 4,630,792 Shares (2) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
Shares of KRF Company, L.L.C. 4,630,792 Shares (3) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
-13-
Shares of The Krupp Family Limited Partnership - 94 4,630,792 Shares (4) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
Shares of The George Krupp 1980 Family Trust 4,630,792 Shares (5) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
Shares of The Douglas Krupp 1980 Family Trust 4,630,792 Shares (5) 30.76%
Beneficial One Beacon Street, Suite 1500
Interest Boston, MA 02108
Shares of George D. Krupp 4,630,792 Shares (6) 30.76%
Beneficial c/o Berkshire Income Realty, Inc.
Interest One Beacon Street, Suite 1500
Boston, MA 02108
Shares of Douglas Krupp 4,630,792 Shares (6) 30.76%
Beneficial c/o Berkshire Income Realty, Inc.
Interest One Beacon Street, Suite 1500
Boston, MA 02108
Shares of Douglas Krupp 10,000 Shares (7) **
Beneficial One Beacon Street
Interest Boston, MA 02108
Shares of All Directors and Officers 10,000 Shares **
Beneficial One Beacon Street
Interest Boston, MA 02108
(1) In connection with the April 4, 2003 closing of BIR's offer to exchange
shares of it's 9% Series A Cumulative Redeemable Preferred Stock,
liquidation value $25 per share ("Preferred Stock") for shares of
beneficial interest ("Shares") in Krupp Government Income Trust ("the
Trust"), BIR acquired 4,630,792 Shares of the Trust. On April 4, 2003, BIR
contributed such shares to BIR - OP in exchange for 100% of the preferred
limited partnership interest in BIR - OP. BIR also owns 100% of the
limited liability company interests of BIR GP, L.L.C., the general partner
of BIR - OP. By virtue of such interests, BIR may be deemed to
beneficially own indirectly the Shares of the Trust owned by BIR - OP.
(a) Per the form of Amended and Restated Voting Agreement (the "Voting
Agreement") between BIR and the Trust, BIR shall vote with respect to any
matter brought before such holders of Shares, all of the BIR Shares in
proportion to the votes cast by the other holders of Shares of the Trust.
In each case where BIR is a beneficial owner of Shares, BIR effectively
has no voting or investment powers in the Trust.
(2) BIR GP, L.L.C. owns 100% of the general partnership interests in BIR - OP,
and by virtue of such interest, BIR GP, L.L.C. may be deemed to
beneficially own indirectly the Shares of the Trust owned by BIR - OP.
(3) KRF Company, L.L.C. owns 100% of the common limited partnership interests
in BIR - OP and 100% of the common stock of BIR, and by virtue of such
interests, KRF Company, L.L.C. may be deemed to beneficially own
indirectly the Shares of the Trust owned by BIR - OP.
(4) The Krupp Family Limited Partnership - 94 owns 100% of the limited
liability company interests in KRF company, L.L.C., and by virtue of such
interest, The Krupp Family Limited Partnership - 94 may be deemed to
beneficially own indirectly the Shares of the Trust owned by BIR - OP.
(5) Each of the Douglas Krupp 1980 Family Trust and The George Krupp 1980
Family Trust owns 50% of the limited partnership interests in the Krupp
Family Limited Partnership - 94, and by virtue of such interests, The
Douglas Krupp 1980 Family Trust and The George Krupp 1980 Family Trusts
each may be deemed to beneficially own indirectly the Shares of the Trust
owned by BIR - OP. The trustees of The Douglas Krupp 1980 Family Trust are
Paul Krupp, Lawrence Silverstein and Vincent O'Reilly, and the trustees of
the George Krupp 1980 Family Trust are Paul Krupp and Lawrence
Silverstein. Each of the trustees of The Douglas Krupp 1980 Family Trust
and The George Krupp 1980 Family Trust disclaims
-14-
beneficial ownership of any such Shares of the Trust that are or may be
deemed to be beneficially owned by Douglas Krupp, George D. Krupp, The
Douglas Krupp 1980 Family Trust or The George Krupp 1980 Family Trust.
(6) The general partners of The Krupp Family Limited Partnership - 94 are
George D. Krupp and Douglas Krupp, each of whom owns 50% of the general
partner interests in the Krupp Family Limited Partnership - 94, and by
virtue of such interests, George D. Krupp and Douglas Krupp each may be
deemed to beneficially own indirectly the Shares of the Trust owned by BIR
- OP.
(7) 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
partners of Berkshire Mortgage Finance 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 21, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of the Advisory Service Agreement, the Advisor receives an Asset
Management Fee equal to 0.75% per annum of the value of the Trust's actual and
committed invested assets payable quarterly. During 2003, the Advisor received
$185,359 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 2003, The
Berkshire Companies Limited Partnership and Berkshire Mortgage Finance Limited
Partnership, affiliates of the Advisor, received a total of $370,872 in
reimbursements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees billed to the Trust by
PricewaterhouseCoopers LLP for professional services rendered for the fiscal
years ended December 31, 2003 and December 31, 2002:
Fee Category Fiscal 2003 Fees Fiscal 2002 Fees
- ------------ ---------------- ----------------
Audit Fees $ 37,000 $ 37,000
Audit-Related Fees -- 4,868
Tax Fees 3,675 3,500
-------- --------
Total Fees $ 40,675 $ 45,368
======== ========
Audit Fees. Consists of fees billed for professional services rendered for the
audit of the Trust's annual financial statements and for the reviews of the
unaudited financial statements included in the Trust's Quarterly Reports on Form
10-Q during 2003.
Audit-Related Fees. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit of the Trust's
annual financial statements and for the reviews of the unaudited quarterly
financial statements and are not reported under "Audit Fees." For 2002,
represents fees for S-11 research and SEC Comment Letter response in connection
with the BIR exchange offer.
Tax Fees. Consists of fees billed for professional services for tax compliance.
-15-
PART IV
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, 2003, the Trust did
not file any reports on Form 8-K.
(c) Exhibits:
Number and Description
Under Regulation S-K
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)].*
(10.3) Waiver and Standstill Agreement, dated as of August 22,
2002, by and among Krupp Government Income Trust, Krupp
Government Income Trust II, Berkshire Income Realty,
Inc. and Berkshire Income Realty - OP, L.P [Exhibit 10.3
to Registrant's report on Form 10-K for the year ended
December 31, 2002 (File No. 0-19244)]*
(10.4) Form of Amended and Restated Voting Agreement among
Krupp Government Income Trust, Krupp Government Income
Trust II and Berkshire Income Realty, Inc. [Exhibit 10.4
to Registrant's report on Form 10-K for the year ended
December 31, 2002 (File No. 0-19244)]*
(10.5) Extension and Waiver and Standstill Agreement, dated
March 5, 2003, by and among Krupp Government Income
Trust, Krupp Government Income Trust II, Berkshire
Income Realty, Inc. and Berkshire Income Realty, OP,
L.P. [Exhibit 10.5 to Registrant's report on Form 10-K
for the year ended December 31, 2002 (File No.
0-19244)]*
-16-
Mountain View Apartments
(10.6) 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)].*
(10.7) 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)].*
(10.8) 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)].*
(10.9) 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)].*
(10.10) 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)].*
(10.11) 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)].*
(10.12) 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)].*
(10.13) 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)]*
(10.14) Third Modification Agreement dated September 8, 2003, by
and among Krupp Government Income Trust, a Massachusetts
business trust; Mountain View LTD, an Alabama limited
partnership; and Philip P. Mulkey, Henry V. Bragg and
Gregory V. Bragg. [Exhibit 10.1 to Registrant's report
on Form 10-Q for the quarter ended September 30, 2003
(File No. 0-19244)]*
(31) Other
(31.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. +
(31.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. +
(32) Other
(32.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. +
(32.2) Chief Accounting Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. +
* Incorporated by reference
+ Filed herewith
-17-
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 18th day of March,
2004.
KRUPP GOVERNMENT INCOME TRUST
By: /s/ Peter F. Donovan
-------------------------------------
Peter F. Donovan, Chief Executive Officer
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 18th day of March, 2004.
Signatures Title(s)
---------- --------
/s/ Peter F. Donovan Chief Executive Officer
- -----------------------------
Peter F. Donovan
/s/ Alan Reese Treasurer of Krupp Government Income Trust
- -----------------------------
Alan Reese
/s/ Douglas Krupp Chairman of the Board of Trustees and a
- ----------------------------- Trustee of the Krupp Government Income Trust
Douglas Krupp
/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-
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, 2003
F-1
KRUPP GOVERNMENT INCOME TRUST
INDEX TO FINANCIAL STATEMENTS, SCHEDULE AND SUPPLEMENTARY DATA
----------------------
Report of Independent Auditors F-3
Balance Sheets at December 31, 2003 and 2002 F-4
Statements of Income and Comprehensive Income for the Years
Ended December 31, 2003, 2002 and 2001 F-5
Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001 F-6
Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001 F-7
Notes to Financial Statements F-8 - F-18
Schedule II - Valuation and Qualifying Accounts F-19
Supplementary Data - Selected Quarterly Financial Data (Unaudited) F-20
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
REPORT OF INDEPENDENT AUDITORS
----------------------
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, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2003 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 18, 2004
F-3
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
December 31, 2003 and 2002
----------------------
ASSETS
2003 2002
------------ ------------
Participating Insured Mortgage Investments ("PIMIs") (Notes B, C, and J):
Insured Mortgages $ 9,081,728 $ 32,255,154
Additional Loans, net of impairment provision of $1,032,617
and $1,032,272, respectively 367,383 4,537,719
Participating Insured Mortgages ("PIMs") (Notes B, D, and J) -- 16,949,637
Mortgage-Backed Securities and insured mortgage loan
("MBS") (Notes B, E and J) 1,641,849 6,313,121
------------ ------------
Total mortgage investments 11,090,960 60,055,631
Cash and cash equivalents (Notes B and J) 1,636,525 1,986,243
Interest receivable and other assets 72,247 370,542
Prepaid acquisition fees and expenses, net
of accumulated amortization of $738,546 (Note B) -- 46,160
Prepaid participation servicing fees, net of
accumulated amortization of $683,812 (Note B) -- 62,497
------------ ------------
Total assets $ 12,799,732 $ 62,521,073
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note B) $ 367,383 $ 1,351,768
Other liabilities 140,467 48,938
------------ ------------
Total liabilities 507,850 1,400,706
------------ ------------
Commitments (Note H)
Shareholders' equity (Notes A, F, and H):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares issued and outstanding 12,192,126 60,668,605
Accumulated comprehensive income (Note B) 99,756 451,762
------------ ------------
Total Shareholders' equity 12,291,882 61,120,367
------------ ------------
Total liabilities and Shareholders' equity $ 12,799,732 $ 62,521,073
============ ============
The accompanying notes are an integral
part of the financial statements.
F-4
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2003, 2002 and 2001
----------------------
2003 2002 2001
------------ ------------ ------------
Revenues:
Interest income - PIMs and PIMIs:
Basic interest $ 2,098,775 $ 4,530,671 $ 7,901,086
Additional Loan interest 1,954,960 984,386 1,515,330
Participation interest 1,794,493 2,027,808 7,602,737
Interest income - MBS 452,800 1,237,926 1,251,710
Interest income - cash and cash equivalents 115,501 229,786 261,513
------------ ------------ ------------
Total revenues 6,416,529 9,010,577 18,532,376
------------ ------------ ------------
Expenses:
Asset management fee to an affiliate (Note G) 185,359 561,859 950,966
Expense reimbursements to affiliates (Note G) 347,598 202,936 243,109
Amortization of prepaid fees and expenses (Note B) 108,657 695,842 1,352,788
General and administrative (Note G) 361,167 434,134 477,102
Reduction of provision for impaired mortgage
loans (Notes B and C) -- (666,539) (463,807)
------------ ------------ ------------
Total expenses 1,002,781 1,228,232 2,560,158
------------ ------------ ------------
Net income (Note I) 5,413,748 7,782,345 15,972,218
Other comprehensive income:
Net increase (decrease) in unrealized gain on MBS (352,006) (126,866) 133,752
------------ ------------ ------------
Total comprehensive income $ 5,061,742 $ 7,655,479 $ 16,105,970
============ ============ ============
Basic earnings per Share $ 0.36 $ .52 $ 1.06
============ ============ ============
Weighted average Shares outstanding 15,053,135 15,053,135 15,053,135
============ ============ ============
The accompanying notes are an integral
part of the financial statements.
F-5
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2003, 2002 and 2001
----------------------
Accumulated Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
------------- ------------- ------------- -------------
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
Dividends (67,182,269) (7,782,345) -- (74,964,614)
Net income -- 7,782,345 -- 7,782,345
Change in unrealized gain on MBS -- -- (126,866) (126,866)
------------- ------------- ------------- -------------
Balance at December 31, 2002 60,668,605 -- 451,762 61,120,367
Dividends (48,476,479) (5,413,748) -- (53,890,227)
Net income -- 5,413,748 -- 5,413,748
Change in unrealized gain on MBS -- -- (352,006) (352,006)
------------- ------------- ------------- -------------
Balance at December 31, 2003 $ 12,192,126 $ -- $ 99,756 $ 12,291,882
============= ============= ============= =============
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
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
----------------------
2003 2002 2001
------------ ------------ ------------
Operating activities:
Net income $ 5,413,748 $ 7,782,345 $ 15,972,218
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of discounts (31,471) (170,891) (110)
Reduction of provision for impaired mortgage loans -- (666,539) (463,807)
Amortization of prepaid fees and expenses 108,657 695,842 1,352,788
Changes in assets and liabilities:
Decrease in interest receivable and other assets 298,295 386,290 325,580
Decrease in deferred income on Additional Loans (984,385) (984,386) (1,214,331)
Increase (decrease) in other liabilities 91,529 28,453 (495)
------------ ------------ ------------
Net cash provided by operating activities 4,896,373 7,071,114 15,971,843
------------ ------------ ------------
Investing activities:
Principal collections on MBS 4,350,737 8,702,252 1,699,012
Principal collections on Additional Loans 4,170,336 -- 4,943,617
Principal collections on PIMs and Insured Mortgages 40,123,063 48,023,260 9,416,268
------------ ------------ ------------
Net cash provided by investing activities 48,644,136 56,725,512 16,058,897
------------ ------------ ------------
Financing activity:
Dividends (53,890,227) (74,964,614) (24,235,550)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (349,718) (11,167,988) 7,795,190
Cash and cash equivalents, beginning of year 1,986,243 13,154,231 5,359,041
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,636,525 $ 1,986,243 $ 13,154,231
============ ============ ============
Non cash activities:
Increase (decrease) in unrealized gain on MBS $ (352,006) $ (126,866) $ 133,752
============ ============ ============
The accompanying notes are an integral
part of the financial statements.
F-7
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 a portion of the MBS portfolio may 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.
PIMs and PIMIs
The Trust accounted 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 had a participation feature. As a result, the Trust
would not sell or otherwise dispose of the MBS. Accordingly, the Trust had
both the intention and ability to hold these investments to expected
maturity. The Trust carried 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 the 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 "Accounting
by Creditors for Impairment of a Loan" and FAS 118 "Accounting by
Creditors for Impairment of a Loan- Income Recognition and Disclosures".
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") 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 PIMIs generate sufficient cash flow to make
required Additional
Continued
F-8
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
B. Significant Accounting Policies, continued
PIMs and PIMIs, continued
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 for 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 majority of the Trust's cash and cash equivalents are held at major
commercial banks which may at times exceed the Federal Deposit Insurance
Corporation limit of $100,000. The Trust has not experienced any losses to
date on its invested cash.
Prepaid Fees and Expenses
Prepaid fees and expenses represented prepaid acquisition fees and
expenses and prepaid participation servicing fees paid for the acquisition
and servicing of PIMs and PIMIs. The Trust amortized prepaid acquisition
fees and expenses using a method that approximates the effective interest
method over a period of ten to twelve years, which represented the
estimated life of the underlying mortgage.
The Trust amortized 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.
Upon the repayment of a PIM or PIMI any unamortized acquisition fees and
expenses and unamortized participation servicing fees related to such loan
were 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.
Estimates and Assumptions
The preparation of financial statements in accordance with 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.
Continued
F-9
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
C. PIMIs
The Trust had investments in one PIMI on December 31, 2003 and three PIMIs
on December 31, 2002 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 if 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 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
Continued
F-10
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
C. PIMIs, continued
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 May 30, 2003, the Trust received a prepayment of the Windward Lakes
Apartments Subordinated Promissory Note and the Windward Lakes Apartments
Additional Loan. The Trust received $2,471,294 of Additional Loan
principal, $970,575 of Additional Loan interest, $719,682 of Shared
Appreciation Interest and $684,291 of accrued interest from the workout
agreement that expired in 2000. On June 16, 2003, the Trust received
$13,301,440 in principal proceeds on the first mortgage note. In addition,
the Trust recognized $373,757 of Additional Loan interest that had been
previously received and recorded as deferred income on the Additional
Loan. On July 24, 2003, the Trust paid a special dividend of $1.22 per
share from the proceeds of the Windward Lakes prepayment.
On March 12, 2003, the Trust sold the Lifestyles Ginnie Mae MBS at par for
$9,746,038 to the borrower of the Lifestyles PIMI. Concurrently, the
borrower paid off the full amount due on the Additional Loan of
$1,817,665. In addition, the Trust recognized $343,659 of Additional Loan
interest previously received and recorded as deferred income on the
Additional Loan. On May 7, 2003, the Trust paid a special dividend of
$0.77 per share from the proceeds of the Lifestyles Apartments PIMI.
On January 3, 2002, the Trust received $18,330,825 representing the
principal proceeds on the first mortgage loan from the Red Run PIMI plus
$120,296 of interest on the first mortgage loan. 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. On
January 16, 2002, the Trust paid a special dividend of $1.68 per share
from the proceeds of the Red Run PIMI prepayment.
Mountain View has experienced problems due to competitive market
conditions. In June 1999, the Trust approved a second workout of the
Mountain View. 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 2004, and to change the loan's
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 and its application towards Additional Loan
interest. 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.
The Mountain View Additional Loan was scheduled to mature in September
2003. When the trust entered into the second workout agreement in June
1999, it was the Trust's intention to extend the maturity date of the
Additional Loan to coincide with the expiration date of the interest
rebate in December of 2004. While reviewing the existing Additional Loan
Agreement, the Advisor noted that the maturity date of the Additional Loan
was not updated at the time of the second workout agreement. On September
8, 2003, the Advisor entered into a third modification with the borrower
to extend the maturity date to December 31, 2004 to correct this
oversight.
Continued
F-11
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
C. PIMIs, continued
During 2002 and 2003, operating results at Mountain View have
deteriorated. A building with 20 three-bedroom apartments was out of
service for 18 months as a result of a fire in 2001. Reconstruction work
necessitated by the fire was completed in mid-2002, with insurance
proceeds covering the total cost of the restoration and a portion of the
rental income. Additionally, occupancy in the remaining units has been
affected by local economic conditions. These factors have made the rental
market much more competitive for apartment owners, and the use of
concessions to attract potential renters has increased throughout the
market. Consequently, rental income was down in 2002 and did not improve
in 2003. At the same time, both insurance costs and real estate taxes have
increased dramatically, further deteriorating operating results. As a
result of the factors described above, the Trust maintains a valuation
allowance for Mountain View of $1,032,617. Between the valuation allowance
and the related deferred income on Additional Loans liability account, the
Mountain View additional loan has been effectively fully reserved.
At December 31, 2003 and 2002 there are no PIMIs 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,
2003 and 2002:
Original Approximate
Loan Monthly Interest Maturity Balance Outstanding
Insured Mortgage Amount Payments Rate Date at December 31,
- ---------------- ----------- ----------- ----------- ----------- ----------- -----------
2003 2002
----------- -----------
Lifestyles (GNMA) $10,292,394 $ -- -- -- $ -- $ 9,765,191
Windward (GNMA) 14,000,778 -- -- -- -- 13,342,264
Mountain View (FHA) 9,547,700 58,000 6.875% 01/01/2034 9,081,728 9,147,699
----------- ----------- ----------- -----------
(a)
$33,840,872 $ 58,000 $ 9,081,728 $32,255,154
=========== =========== =========== ===========
(b)
Base Preferred
Outstanding Balance Maturity Interest Interest
Additional Loan 2003 2002 Date Rate Rate
- --------------- ----------- ----------- ----------- ----------- -----------
Lifestyles:
Due Contractually $ -- $ 1,817,665 -- -- --
Interest applied -- (118,968)
----------- -----------
Recorded Value -- 1,698,697
Windward -- 2,471,294 -- -- --
Mountain View (a) 1,400,000 1,400,000 12/31/2004 7.0% --
----------- -----------
$ 1,400,000 $ 5,569,991
=========== ===========
(c)
Continued
F-12
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
C. PIMIs, continued
(a) 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 permanently forgiven.
(b) The aggregate cost for federal income tax purposes is $9,081,728.
(c) The aggregate cost for federal income tax purposes is $1,400,000.
Impaired Additional Loans
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 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 2003, 2002 or 2001.
The activity in the valuation allowance together with the related recorded
and carrying value of the mortgage loans is as follows:
Recorded Valuation Carrying
Value Allowance Value
----------- ----------- -----------
Mountain View $ 1,400,000 $ 1,032,617 $ 367,383
----------- ----------- -----------
Balance at December 31, 2003 $ 1,400,000 $ 1,032,617 $ 367,383
=========== =========== ===========
The Trust also has deferred income related to Mountain View of $367,383.
Between the valuation allowance and the related deferred income, the
Mountain View Additional Loan has been effectively fully reserved.
Continued
F-13
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
C. PIMIs, continued
A reconciliation of activity for each of the three years in the period
ended December 31, is as follows:
Insured Mortgages
2003 2002 2001
------------ ------------ ------------
Balance at beginning of period $ 32,255,154 $ 50,811,558 $ 59,752,085
Insured Mortgage prepayments (23,053,908) (18,330,825) (8,575,180)
Principal collections (119,518) (225,579) (365,347)
------------ ------------ ------------
Balance at end of period $ 9,081,728 $ 32,255,154 $ 50,811,558
============ ============ ============
Additional Loans
2003 2002 2001
------------ ------------ ------------
Balance at beginning of period $ 4,537,719 $ 3,871,180 $ 8,350,990
Interest received and recognized as
Additional Loan prepayment -- -- (118,968)
Additional Loan prepayments (4,169,991) -- (4,824,649)
Adjustment to valuation allowance (345) 666,539 463,807
------------ ------------ ------------
Balance at end of period $ 367,383 $ 4,537,719 $ 3,871,180
============ ============ ============
Property Description:
Mountain View Apartments ("Mountain View") is a 256-unit apartment complex
located in Madison, Alabama.
D. PIMs
At December 31, 2003 the Trust had no investments in PIMs. On December 31,
2002, the trust had investments in two PIMs. The Trust's PIMs consisted of
a sole participation interest in a HUD-insured first mortgage loan
originated under the FHA lending program (the "Insured Mortgages"), and
participation interests in the revenue stream and appreciation of the
underlying property above specified base levels. The borrower conveyed
these participation features to the Trust generally through a subordinated
promissory note and mortgage (the "Agreements").
On March 27, 2003, the Trust received a prepayment of the Rivergreens
Apartments Subordinated Promissory Note. The Trust received $547,978 of
Shared Appreciation Interest and $383,297 of Minimum Additional Interest.
On April 10, 2003, the Trust received $9,500,670 representing the
principal proceeds on the first mortgage loan from the Rivergreens
Apartments PIM. On May 9, 2003, the Trust paid a special dividend of $0.70
per share from the proceeds of the Rivergreens Apartments PIM prepayment.
On January 21, 2003, the Trust received a prepayment of the Mill Pond I
PIM of $7,430,727 representing the principal proceeds on the first
mortgage. The underlying property value did not increase sufficiently to
meet the criteria for the Trust to earn any participating interest. On May
5, 2003, the Trust paid a special dividend of $0.50 per share from the
proceeds of the Mill Pond I PIM.
Continued
F-14
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
D. PIMs, continued
On July 25, 2002, the Trust received $13,676,641 representing the
principal proceeds on the first mortgage loan from the Lincoln Green
Apartments PIM. On June 28, 2002, the Trust received a prepayment of the
Lincoln Green Apartments Subordinated Promissory Note. The Trust received
$725,000 of Shared Appreciation Interest and $278,785 of Shared Income
Interest and Minimum Additional Interest. On August 28, 2002, the Trust
paid a special dividend of $0.99 per share from the proceeds of the
Lincoln Green Apartments PIM prepayment
On May 15, 2002, the Trust received $8,884,123 representing the principal
proceeds on the first mortgage loan from the River View Apartments PIM. In
addition, the Trust received a prepayment premium of $88,841 from the
payoff. On June 4, 2002, the Trust paid a special dividend of $0.61 per
share from the proceeds of the River View Apartments PIM prepayment.
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 loan. In addition, the Trust
received a prepayment premium of $66,257 from the payoff. On March 1,
2002, the Trust paid a special dividend of $0.51 per share from the
proceeds of the Waterford Apartments PIM prepayment.
The Trust's PIMs consisted of the following at December 31, 2003 and 2002:
Original Approximate
Loan Monthly Interest Maturity
Amount Payments Rate Date Balance Outstanding at December 31,
----------- ----------- ----------- ----------- -----------------------------------
2003 2002
----------- -----------
Mill Pond (FHA) $ 7,812,100 $ -- -- -- $ -- $ 7,430,727
Rivergreens (FHA) 10,003,000 -- -- -- -- 9,518,910
----------- ----------- ----------- ----------- ----------- -----------
Total $17,815,100 $ -- $ -- $16,949,637
=========== =========== =========== =========== =========== ===========
A reconciliation of activity for each of the three years in the period
ended December 31, is as follows:
2003 2002 2001
------------ ------------ ------------
Balance at beginning of period $ 16,949,637 $ 46,416,493 $ 46,892,234
Insured Mortgage prepayments (16,931,397) (29,186,506) --
Principal collections (18,240) (280,350) (475,741)
------------ ------------ ------------
Balance at end of period $ -- $ 16,949,637 $ 46,416,493
============ ============ ============
Continued
F-15
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
E. MBS
At December 31, 2003, the Trust's MBS portfolio had an amortized cost of
$1,542,093 and gross unrealized gains of $99,756. At December 31, 2002,
the Trust's MBS portfolio had an amortized cost of $5,861,359 and gross
unrealized gains of $451,762. The Trust's MBS have maturities ranging from
2008 to 2023.
On July 15, 2003, the Trust received a prepayment of the Pointe East
Apartments insured mortgage for $3,251,119. The Trust also received a
prepayment premium of $130,045 from this payoff. On August 4, 2003, the
Trust paid a special dividend of $0.23 per share from the proceeds of the
Pointe East Apartments insured mortgage payoff.
On August 27, 2002, the Trust received $4,856,759 representing the
principal proceeds on the first mortgage loan from the Rosemont Apartments
MBS. In addition, the Trust received a prepayment premium of $194,270 from
this payoff. On September 12, 2002, the Trust paid a special dividend of
$0.34 per share from the proceeds of the Rosemont Apartments MBS
prepayment
On May 15, 2002 the Trust received $2,487,447 representing the principal
proceeds on the first mortgage loan from the Parkwest Apartments MBS. In
addition, the Trust received a prepayment premium of $49,749 from this
payoff. On June 19, 2002, the Trust paid a special dividend of $0.17 per
share from the proceeds of the Parkwest Apartments MBS prepayment.
The Trust's MBS portfolio had the following contractual maturities as of
December 31, 2003:
Unrealized
Maturity Date Fair Value Gain/(Loss)
------------- ------------- -------------
2004 - 2008 $ 22,515 $ 581
2009 - 2013 -- --
2014 - 2023 1,619,334 99,175
------------- -------------
Total $ 1,641,849 $ 99,756
============= =============
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
90% 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 unless an exemption is granted by the Trustees 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.
On August 22, 2002, the Trustees agreed to waive the ownership limit to
allow affiliates of the Advisor to own up to 55% of the outstanding shares
of the Trust. The affiliates delivered an opinion of counsel to the effect
that this waiver will not cause the Trust to lose its status as a REIT. In
connection with this waiver, the affiliates also agreed to not take any
action to cause the Trust to cease to be a reporting company under the
Exchange Act or to cause a majority of the board of trustees to no longer
be comprised of independent trustees. They also agreed not to solicit,
seek to effect, negotiate with or provide any information to any other
party with the intent of effecting a business combination with the Trust
without the approval of a majority of the board of trustees. In April of
2003, BIR acquired 30.76% of the outstanding shares of the Trust.
Continued
F-16
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
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
general and administrative expenses are legal fees and expenses paid by
the Trust to an affiliate of $23,274, $20,851 and $12,033, for the years
ended December 31, 2003, 2002 and 2001, respectively.
The Trust received interest collections on Additional Loans with
affiliates of the advisor of $155,738 in 2001. In addition, the Trust
received $3,431,133 in 2001 related to participation interest income on
these same loans.
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.
I. Federal Income Taxes
Net income per statement of income $ 5,413,748
Less: Book to tax difference related to Additional Loan
interest income (1,985,392)
Add: Increase in the provision for impaired mortgage loans 345
Less: Book to tax difference for participation income (118,968)
Less: Book to tax difference related to amortization
of prepaid fees and expenses (3,118,775)
-----------
Net income for federal income tax purposes $ 190,958
===========
The Trust paid dividends of $3.58 per share during 2003, which represents
approximately $0.01 from ordinary income and $3.57 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 $1,689,000 and $5,576,000 at December
31, 2003 and 2002, respectively. The basis of the Trust's liabilities for
financial reporting purposes exceeded its tax basis by approximately
$367,000 and $1,351,000 at December 31, 2003 and 2002, 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.
Continued
F-17
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
----------------------
J. Fair Value Disclosures of Financial Instruments, continued
MBS
The Trust estimates the fair value of MBS based on quoted market prices.
Based on the estimated fair value determined using these methods and
assumptions the Trust's investments in MBS had gross unrealized gains of
approximately $100,000 at December 31, 2003 and $452,000 at December 31,
2002.
PIMs and PIMIs
There is no active trading market for these investments. Accordingly,
management estimated the fair value of the PIMs and estimates the insured
mortgage portion of the PIMIs using quoted market prices of MBS having the
same stated coupon rate as the Insured Mortgages and similar expected
maturity date. Additional Loans are based on the lower of the estimated
collection value of the loan or the remaining principal balance of the
loan 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
amount or timing of realization of any such feature with any certainty.
Based on the estimated fair value determined using these methods and
assumptions, the Trust's remaining PIMI did not have any gross unrealized
gains or losses at December 31, 2003. The Trust's investments in PIMs and
PIMIs had gross unrealized gains of approximately $2,832,000 at December
31, 2002.
At December 31, 2003 and 2002, the Trust estimated the fair value of its
financial instruments as follows:
(amounts in thousands)
2003 2002
------------------- -------------------
Fair Carrying Fair Carrying
Value Value Value Value
-------- -------- -------- --------
Cash and cash equivalents $ 1,637 $ 1,637 $ 1,986 $ 1,986
MBS 1,642 1,642 6,313 6,313
PIMs and PIMIs:
PIMs -- -- 17,708 16,950
Insured mortgages 9,082 9,082 34,329 32,255
Additional Loans -- 367 4,538 4,538
-------- -------- -------- --------
$ 12,361 $ 12,728 $ 64,874 $ 62,042
======== ======== ======== ========
F-18
KRUPP GOVERNMENT INCOME TRUST
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
2003
Balance at Charged to Balance at
beginning costs and end of
Description of period expenses Recoveries period
- ----------- ---------- ---------- ---------- ----------
Additional Loan
impairment provision $1,032,272 $ 345 $ -- $1,032,617
========== ========== ========== ==========
2002
Balance at Charged to Balance at
beginning costs and end of
Description of period expenses Reversals period
- ----------- ---------- ---------- ---------- ----------
Additional Loan
impairment provision $1,698,811 $ -- $ (666,539) $1,032,272
========== ========== ========== ==========
2001
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
========== ========== ========== ==========
F-19
KRUPP GOVERNMENT INCOME TRUST
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
For the Quarter Ended
---------------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
------------ ------------ ------------ ------------
Total revenues $ 2,497,149 $ 3,352,946 $ 374,498 $ 191,936
============ ============ ============ ============
Net income (loss) $ 2,122,030 $ 3,130,339 $ 184,649 $ (23,270)
============ ============ ============ ============
Earnings per Share $ .14 $ .21 $ .01 $ --
============ ============ ============ ============
For the Quarter Ended
---------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
------------ ------------ ------------ ------------
Total revenues $ 2,671,810 $ 2,907,424 $ 1,460,584 $ 1,970,759
============ ============ ============ ============
Net income $ 2,086,813 $ 2,328,365 $ 1,056,691 $ 2,310,476
============ ============ ============ ============
Earnings per Share $ 0.14 $ 0.15 $ 0.07 $ 0.16
============ ============ ============ ============
F-20