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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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 jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
SEC 1296 (01-04) Potential persons who are to 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.
-1-
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this Form 10-Q, the words "believes," "anticipates,"
"expects," "plans," "intends," "estimates," "continue," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties, including but not limited to the following: federal, state or
local regulations; adverse changes in general economic or local conditions;
pre-payments of mortgages; failure of borrowers to pay participation interests
due to poor operating results of properties underlying the mortgages; uninsured
losses and potential conflicts of interest between the Trust and its Affiliates,
including the Trustees. The Company's filings with the Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 2003, contain additional information concerning such risk factors. Actual
results in the future could differ materially from those described in any
forward-looking statements as a result of the risk factors set forth above, and
the risk factors described in the Annual Report.
-2-
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
ASSETS
June 30, December 31,
2004 2003
----------- -----------
Participating Insured Mortgage Investments
("PIMIs") (Note 2):
Insured Mortgages $ 9,046,653 $ 9,081,728
Additional Loans, net of impairment provision of $1,032,617 367,383 367,383
Mortgage-Backed Securities ("MBS") (Note 3) 1,391,565 1,641,849
----------- -----------
Total mortgage investments 10,805,601 11,090,960
Cash and cash equivalents 1,408,070 1,636,525
Due from affiliates (Note 4) 414,276 --
Interest receivable and other assets 68,716 72,247
----------- -----------
Total assets $12,696,663 $12,799,732
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans $ 367,383 $ 367,383
Other liabilities 90,945 140,467
----------- -----------
Total liabilities 458,328 507,850
----------- -----------
Shareholders' equity (Note 5):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares issued and outstanding 12,113,965 12,192,126
Accumulated comprehensive income 124,370 99,756
----------- -----------
Total Shareholders' equity 12,238,335 12,291,882
----------- -----------
Total liabilities and Shareholders' equity $12,696,663 $12,799,732
=========== ===========
The accompanying notes are an integral
part of the financial statements.
-3-
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
--------- ----------- --------- -----------
Revenues:
Interest income - PIMs and PIMIs:
Basic interest $ 155,591 $ 1,029,551 $ 311,485 $ 1,786,104
Additional Loan interest (Note 2) -- 1,451,120 -- 1,954,960
Participation interest (Note 2) -- 719,682 -- 1,794,493
Interest income - MBS 27,240 106,916 57,099 219,464
Interest income - cash and cash equivalents 3,425 45,677 7,201 95,074
--------- ----------- --------- -----------
Total revenues 186,256 3,352,946 375,785 5,850,095
--------- ----------- --------- -----------
Expenses:
Asset management fee to an affiliate 21,931 48,060 44,108 138,963
Expense reimbursements to affiliates 31,399 57,999 41,275 155,676
Amortization of prepaid fees and expenses -- 23,849 -- 92,758
General and administrative 99,028 92,699 180,714 210,329
Operating expense limitation (Note 4) (414,276) -- (414,276) --
--------- ----------- --------- -----------
Total expenses (261,918) 222,607 (148,179) 597,726
--------- ----------- --------- -----------
Net income 448,174 3,130,339 523,964 5,252,369
Other comprehensive income:
Net increase (decrease) in unrealized
gain on MBS (12,968) (256,683) 24,614 (226,630)
--------- ----------- --------- -----------
Total comprehensive income $ 435,206 $ 2,873,656 $ 548,578 $ 5,025,739
========= =========== ========= ===========
Basic earnings per Share $ .02 $ .21 $ .03 $ .35
========= =========== ========= ===========
Weighted average Shares outstanding 15,053,135 15,053,135
========== ==========
The accompanying notes are an integral
part of the financial statements.
-4-
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
------------------------------
2004 2003
----------- ------------
Operating activities:
Net income $ 523,964 $ 5,252,369
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of discounts (406) (788)
Amortization of prepaid fees and expenses -- 92,758
Changes in assets and liabilities:
Decrease in interest receivable and other assets 3,531 264,581
Increase in due from affiliates (414,276) --
Decrease in deferred income on Additional Loans -- (984,385)
Decrease in other liabilities (49,522) (14,487)
----------- ------------
Net cash provided by operating activities 63,291 4,610,048
----------- ------------
Investing activities:
Principal collections on MBS 275,304 560,626
Principal collections on Additional Loans -- 4,169,991
Principal collections on PIMs and Insured Mortgages 35,075 40,089,400
----------- ------------
Net cash provided by investing activities 310,379 44,820,017
----------- ------------
Financing activity:
Dividends (602,125) (31,461,054)
----------- ------------
Net increase (decrease) in cash and cash equivalents (228,455) 17,969,011
Cash and cash equivalents, beginning of period 1,636,525 1,986,243
----------- ------------
Cash and cash equivalents, end of period $ 1,408,070 $ 19,955,254
=========== ============
Non cash activities:
Increase (decrease) in unrealized gain on MBS $ 24,614 $ (226,630)
=========== ============
The accompanying notes are an integral
part of the financial statements.
-5-
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted in this report on Form 10-Q pursuant to the Rules and Regulations
of the Securities and Exchange Commission. However, in the opinion of
Berkshire Mortgage Advisors Limited Partnership (the "Advisor"), which is
the advisor to Krupp Government Income Trust (the "Trust"), the
disclosures contained in this report are adequate to make the information
presented not misleading. See Notes to Financial Statements in the Trust's
Form 10-K for the year ended December 31, 2003 for additional information
relevant to significant accounting policies followed by the Trust.
In the opinion of the Advisor of the Trust, the accompanying unaudited
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Trust's financial
position as of June 30, 2004, its results of operations for the three and
six months ended June 30, 2004 and 2003 and its cash flows for the six
months ended June 30, 2004 and 2003.
The results of operations for the three and six months ended June 30, 2004
are not necessarily indicative of the results which may be expected for
the full year. See Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report.
2. PIMIs
At June 30, 2004, the Trust's remaining PIMI had a fair value of
$9,046,653. Fair value of the FHA insured first mortgage is based on MBS
with similar interest rates or on expected payoff proceeds. Fair value
includes the estimated collection value of the Additional Loan. Fair value
does not include any value for the participation features. The remaining
PIMI matures in 2034. At June 30, 2004, the remaining PIMI was not
delinquent as to principal or interest.
Mountain View has been adversely affected by the competitive rental
housing market. Based on the Advisor's analysis of market conditions and
property operations and their effect on the property's value, the Trust
maintains a valuation allowance of $1,032,617 for Mountain View. Between
the valuation allowance and the related deferred income on the Additional
Loans liability account, the Mountain View additional loan has been
effectively fully reserved.
3. MBS
At June 30, 2004, the Trust's MBS portfolio had an amortized cost of
$1,267,195 and unrealized gains of $124,370. The portfolio has maturities
ranging from 2008 to 2023.
4. Operating Expense Limitation
Per Article VI, Section 5 of the Declaration of Trust, the total annual
operating expenses of the Trust may not exceed the greater of 2% of the
average invested assets of the Trust or 25% of the Trust's net income.
These tests are calculated each quarter by the Advisor based on the prior
twelve months of activity. In order for the Trust to be in compliance with
this requirement, the Advisor reduced the operating expenses for the
twelve months ended June 30, 2004 by $414,276.
-6-
5. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for six months ended June 30,
2004 is as follows:
Total Accumulated
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
------------ --------- ------------- -------------
Balance at December 31, 2003 $ 12,192,126 $ -- $ 99,756 $ 12,291,882
Net income -- 523,964 -- 523,964
Dividends (78,161) (523,964) -- (602,125)
Change in unrealized gain on MBS -- -- 24,614 24,614
------------ --------- -------- ------------
Balance at June 30, 2004 $ 12,113,965 $ -- $124,370 $ 12,238,335
============ ========= ======== ============
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and accompanying notes contained in the Trust's 2003 Annual
Report on Form 10-K and in this report on Form 10-Q.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report on Form 10-Q
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 June 30, 2004, the Trust had liquidity consisting of cash and cash
equivalents of approximately $1.4 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 demand on the Trust's liquidity is the quarterly dividend
paid to investors of approximately $300,000, which represents the current
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 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.
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 year
ending December 31, 2003, 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 the June 1999, it
was the Trust's intention to extend the maturity date of the Additional Loan to
coincide with the
-8-
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.
Operating results at Mountain View peaked in 2001, but have deteriorated since
then. Occupancy 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 significantly
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 Mountain View of $1,032,617. Between the valuation allowance and the related
deferred income on Additional Loans liability account, 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.
The borrower has indicated that they are considering refinancing the property in
2004. 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 liquidating dividend.
The invested assets of the Trust have declined significantly due to the number
of prepayments of mortgage investments in 2002 and 2003. Net income has also
declined over this period as a result of the prepayments. Per Article VI,
Section 5 of the Declaration of Trust, the total annual operating expenses of
the Trust may not exceed the greater of 2% of the average invested assets of the
Trust or 25% of the Trust's net income. These tests are calculated each quarter
by the Advisor based on the prior twelve months of activity. In order for the
Trust to be in compliance with this requirement for the twelve months ended June
30, 2004, the Advisor reduced the operating expenses by $414,276. The
application of these same tests in prospective quarters may, however,
substantially change the amount of expenses to be recognized and the resulting
amount due from affiliate. As a result, the timing and amount of the net payment
received from the Advisor in 2004 could be determined by the timing of the
potential Mountain View payoff.
In the event that the remaining PIMI does not payoff 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 insured mortgage portion of the 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 Loan is 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 the Financial Accounting Standards
Board's Statement ("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, "Accounting
for Certain Investments in Debt and Equity Securities", 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 the
remaining PIMI pays off. 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
-9-
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 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 PIMI's generate sufficient cash flow to make
the required Additional Loan interest payments and the Additional Loan value is
deemed collectible, the Trust recognizes income as earned and commences
amortization of the deferred interest amounts into income over the remaining
estimated term of the Additional Loan. During periods where mortgage loans are
impaired the Trust suspends amortizing deferred interest.
The Trust also fully reserves the portion of any Additional Loan interest
payment satisfied through the issuance of an operating loan and any associated
interest due on such operating loan. The Trust will recognize the income related
to the operating loan when the borrower repays amounts due under the operating
loan.
Impaired 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
the 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 represented 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
were expensed.
Results of Operations
Net income of the Trust decreased for the three months ending June 30, 2004 as
compared to the same period ending June 30, 2003 primarily due to decreases in
participation income, additional loan interest and basic interest income on
PIM's and PIMI's. This is partially offset by the operating expense limitation
adjustment and decreases in expense reimbursement to affiliates, asset
management fees and amortization expense. Participation income was greater in
2003 due to the collection of Shared Appreciation Interest from the Windward
Lakes PIMI payoff in May of 2003. Additional loan interest was greater in 2003
due to the recognition of deferred revenue and the collection of accrued
interest from the Windward Lakes PIMI. Basic interest income on PIM's and PIMI's
decreased due to the payoff of the Windward Lakes PIMI mentioned above. In the
second quarter of 2004, the operating expenses of the Trust were decreased in
order for the Trust to be in compliance with the annual operating expenses
limitation test as defined in the Declaration of Trust. Expense reimbursement to
affiliates decreased in 2004 due to the Advisor decreasing its expense
reimbursement in anticipation of the Trust's operating expenses exceeding the
annual operating expense limitation. Asset management fees decreased due to
principal collections and prepayments. Amortization expense decreased due to the
full recognition of prepaid fees and expenses from the Mountain View PIMI in
August 2003.
Net income of the Trust decreased for the six months ending June 30, 2004 as
compared to the same period ending June 30, 2003 primarily due to decreases in
participation income, additional loan interest and basic interest income on
PIM's and PIMI's. This is partially offset by the operating expenses limitation
adjustment and decreases in expense reimbursement to affiliates, asset
management fees and amortization expense. Participation income was greater in
2003 due to the collection of participation income received in 2003 from the
payoffs of the Rivergreens PIM and the Windward Lakes and Lifestyles PIMIs.
Additional loan interest was greater in 2003 due to the recognition of deferred
revenue and the collection of accrued interest from the Windward Lakes PIMI and
the recognition of deferred revenue from the Lifestyles PIMI payoff in March of
2003. Basic interest income on PIM's and PIMI's decreased due to the payoffs of
the Rivergreens PIM and the Lifestyles PIMI in March of 2003 and the Windward
Lakes PIMI in June of 2003. In the second quarter of 2004, the operating
expenses of the Trust were decreased in order for the Trust to be in compliance
with the annual operating expenses limitation test as defined in the Declaration
of Trust. Expense reimbursement to affiliates decreased in 2004 due to the
Advisor decreasing its expense reimbursement in anticipation of the Trust's
operating
-10-
expenses exceeding the annual operating expense limitation. Asset management
fees decreased due to principal collections and prepayments. Asset management
fees decreased due to principal collections and prepayments. Amortization
expense decreased due to the full recognition of prepaid fees and expenses from
the Mountain View PIMI in August 2003, the Rivergreens PIM in March of 2003 and
the Mill Pond I PIM in January of 2003.
Off Balance Sheet Arrangements
The Trust has no off balance sheet arrangements as described in Item
303(a)(4)(ii) of Regulation S-K and did not have any such arrangements during
the period covered by this report on Form 10-Q.
Contractual Obligations
The Trust has no contractual obligations as contemplated by Item 303(a)(5) of
Regulation S-K and did not have any such arrangements either during the period
covered by this report on Form 10-Q or during the Trust's most recent completed
fiscal year.
Item 3. 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, the Federal Home Loan Mortgage Corporation
("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 June 30, 2004, the Trust's investments also include cash and cash equivalents
of approximately $1.1 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 June 30, 2004,
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. It is expected that substantially all of the MBS will prepay
over the same period, mitigating any potential interest rate risk to the
disposition value of any remaining MBS.
The Trust monitors prepayments and considers prepayment trends, as well as
dividend requirements of the Trust, when setting regular dividend policy. For
MBS, the fund forecasts prepayments based on trends in similar securities as
reported by statistical reporting entities such as Bloomberg. For 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.
-11-
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2004, 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. 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 Quarterly Report on Form 10-Q.
(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.
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KRUPP GOVERNMENT INCOME TRUST
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(31.1) Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Chief Accounting Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(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.
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Krupp Government Income Trust
(Registrant)
BY: /s/ Alan Reese
------------------
Alan Reese
Treasurer and Chief Accounting Officer
of Krupp Government Income Trust
Date: August 13, 2004
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