ITEM 1. BUSINESS ------
Krupp Government Income Trust II (the "Trust") is a Massachusetts business trust which was formed on February 8, 1991 and is authorized to sell up to 25,000,000 shares of beneficial interest (the "Shares"). Berkshire Realty Advisors Limited Partnership acquired 10,000 of such Shares and 18,315,158 Shares were sold under the Trust's public offering for $365,686,058 net of purchase volume discounts of $617,102. On December 29, 1994, Berkshire Mortgage Advisors Limited Partnership acquired Berkshire Realty Advisors Limited Partnership's 10,000 shares and assumed the role of the Advisor to the Trust. Under the Dividend Reinvestment Plan ("DRP"), 46,319 Shares were sold for $880,061 (the remaining 6,628,523 Shares are available for general Trust purposes). The Trust has utilized the net proceeds from the public offering 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, 2030, unless earlier terminated by the affirmative vote of holders of a majority of the outstanding shares entitled to vote thereon. See Note A of Notes to Financial Statements included in Appendix A of this report for additional information.
The Trust's investments in PIMs on multi-family residential properties consist of (1) a MBS or an insured mortgage loan (collectively, the "insured mortgage") guaranteed or insured as to principal and basic interest and (2) a participating mortgage. The insured mortgages were issued or originated under or in connection with the housing programs of Fannie Mae or the Federal Housing Administration ("FHA") under the authority of the Department of Housing and Urban Development ("HUD"). PIMs provide the Trust with monthly payments of principal and basic interest and may also provide for Trust participation in the current revenue stream and in the residual value, if any, from a sale or other realization of the underlying property. The borrower conveys the participation rights to the Trust through a subordinated promissory note and mortgage. The participation features are neither insured nor guaranteed.
The PIMIs consist of (1) an insured mortgage, issued by Fannie Mae or originated under the lending program of the FHA, (2) an additional loan ("Additional Loan") to the borrower or owners of the borrower in excess of mortgage amounts insured or guaranteed under Fannie Mae or FHA programs that increases the Trust's total financing with respect to that property and (3) a participating mortgage. Additional Loans associated with insured mortgages issued or originated under or in connection with HUD insured programs cannot, under government regulations, be collateralized by a mortgage on the underlying property. These Additional Loans are typically collateralized by a security interest satisfactory to Berkshire Mortgage Advisors Limited Partnership ("the Advisor"), but are neither insured nor guaranteed. Additional Loans associated with Fannie Mae insured mortgages are collateralized by a subordinated mortgage on the underlying property but are neither insured nor guaranteed. In addition, the participation features related to the participating mortgage are neither insured nor guaranteed. Under the Additional Loans, the Trust receives semi-annual interest payments and may provide additional interest in the future while the participating mortgage provides the Trust participation in the net income and residual value, if any, of the underlying property.
The Trust also has investments in MBS collateralized by single-family and multi-family mortgage loans issued or originated by Fannie Mae, the Government National Mortgage Association ("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae, GNMA and FHLMC guarantee the principal and interest of the Fannie Mae, GNMA and FHLMC MBS, respectively.
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, 2030, the value of the PIMIs and PIMs 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, 2030.
The Trust's investments are not expected to be subject to seasonal fluctuations, although net income may vary somewhat from quarter to quarter based upon the participation features of its investments. The requirements for compliance with federal, state and local regulations to date have not adversely affected the Trust's operations, and the Trust anticipates no adverse effect in the future.
To qualify as a REIT for federal income tax purposes, the Trust made a valid election to be so treated and must continue to satisfy a range of complex requirements including criteria related to its ownership structure, the nature of its assets, the sources of its income and the amount of its dividends to shareholders. The Trust intends to qualify as a REIT in each year of operation, however, certain factors may have an adverse effect on the Trust's REIT status. If for any taxable year, the Trustees and the Advisor determine that any of the asset, income, or dividend tests are not likely to be satisfied, the Trust may be required to borrow money, dispose of mortgages or take other action to avoid loss of REIT status.
Additionally, if the Trust does not qualify as a REIT for any taxable year, it will be subject to federal income tax as if it were a corporation and the shareholders will be taxed as shareholders of a corporation. If the Trust were taxed as a corporation, the payment of such tax by the Trust would substantially reduce the funds available for dividends to shareholders. To the extent that dividends had been made in anticipation of the Trust's qualification as a REIT, the Trust might be required to borrow additional funds or to liquidate certain of its investments in order to pay the applicable tax. Moreover, should the Trust's election to be taxed as a REIT be terminated or voluntarily revoked, the Trust may not be able to elect to be treated as a REIT for the following five-year period.
As of December 31, 2001, there were no personnel directly employed by the Trust.
ITEM 2.
ITEM 2. PROPERTIES ------
None.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS ------
There are no material pending legal proceedings to which the Trust, any director, officer or affiliate of the Trust is a party or 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ------
Currently there is no established public trading market for the Shares.
The number of investors holding Shares as of December 31, 2001 was approximately 13,200.
The Trust has and intends to continue to declare and pay dividends on a quarterly basis. The Trustees established a dividend rate per Share per quarter of $.24 for 2000 and 2001. The Trustees expect to maintain that rate through May 2002.
ITEM 6.
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
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 report on Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Trust's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, federal, state or local regulations; adverse changes in general economic or local conditions; the inability of the borrower to meet financial obligations on additional loans; pre-payments of mortgages; failure of borrowers to pay participation interests due to poor operating results at properties underlying the mortgages; uninsured losses and potential conflicts of interest between the Trust and its Affiliates, including the Advisor.
Liquidity and Capital Resources
At December 31, 2001 the Trust had liquidity consisting of cash and cash equivalents, of approximately $6.5 million as well as the cash inflows provided by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also receive additional cash flow from the participation features of its PIMs and PIMIs. The Trust anticipates that these sources will be adequate to provide the Trust with sufficient liquidity to meet its obligations, including providing dividends to its investors.
The most significant demand on the Trust's liquidity is quarterly dividends, paid to investors of approximately $4.4 million, and special dividends. Funds for dividends come from interest income received on PIMs, PIMIs, MBS and cash and cash equivalents net of operating expenses, and the principal collections received on PIMs, PIMIs and MBS. The portion of dividends funded from principal collections reduces the capital resources of the Trust. As the capital resources of the Trust decrease, the total cash flows to the Trust will also decrease which may result in periodic adjustments to the dividends paid to the investors.
The Advisor periodically reviews the dividend rate to determine whether an adjustment is necessary based on projected future cash flows. The current dividend rate is $.24 per Share per quarter. The Trustees, based on the Advisor's recommendations, generally set a dividend rate that provides for level quarterly distributions. To the extent quarterly dividends do not fully utilize the cash available for distribution and cash balances increase, the Trustees may adjust the dividend rate or distribute such funds through a special dividend.
In addition to providing guaranteed or insured monthly principal and interest payments, the Trust's investments in the PIMs and PIMIs also may provide additional income through the interest on the Additional Loan portion of the PIMIs as well as participation interest based on operating cash flow and increase in the value realized upon the sale or refinance of the underlying properties. However, these payments are neither guaranteed nor insured and depend on the successful operations of the underlying properties.
The Trust received participation interest based on cash flow generated by property operations from four of its investments during the twelve months ended December 31, 2001. Sunset Summit paid $113,253, Martin's Landing paid $217,585, the Lakes paid $380,431 and the Seasons paid $129,872. In addition, the Trust received and recognized participation interest related to the payoffs of the Seasons and Hunters Pointe PIMIs. During 2000, property operations at Oasis improved enough that the Trust was able to reverse its allowance for loan loss of $994,000 on this property.
Windmill Lakes is a twelve-year old, basic apartment community that has not been able to compete against the influx of new apartment communities that have extensive amenity packages. Builders use deep marketing concessions to fill the new properties, lowering the cost of renting a new apartment and making it more difficult for older properties like Windmill Lakes to attract residents. During the fourth quarter of 2000, occupancy was in the 70% range. The property's curb appeal, a critical element in a competitive market, has suffered as well because there has not been enough cash flow for adequate maintenance. The borrower on the Windmill Lakes PIMI has been unable to secure a purchaser for the property at a price high enough to cover all of the ownership entity's outstanding liabilities and has decided to sell the apartments off as condominiums. Converting a multifamily property to condominium ownership is often a long process that requires resources and expertise in marketing, financing, legal matters and construction. Local and state agencies regulate the conversion of existing housing into condominium ownership, and there are various compliance regulations governing the process as well. On July 25, 2001, the borrower finalized an agreement with the Trust which will allow for the release of the participation features on the PIMI in the event that the first mortgage, the additional loan and any accrued but unpaid base interest on the Additional Loan are paid in full by September 1, 2002. In addition, the Trust required the owner to pay current and outstanding Additional Loan base interest as of March 1, 2001 of $512,500. In the event that the required payments are not received, the participation features will remain in force. As a result of the performance of the property, the Trust had initially established a valuation allowance of $2,000,000 on the Additional Loan in 1998. The Trust has reflected the $512,500 received plus $50,000 previously received as a reduction in the principal balance of the Additional Loan and related impairment provision. Additionally, based upon improved market conditions and property operations, the Trust has further reduced the impairment provision by $937,500 to $500,000 in the fourth quarter of 2001.
Whether the operating performance of any of the properties mentioned above provide sufficient cash flow from operations to pay either the Additional Loan interest or participation income will depend on factors that the Trust has minimal control over. Should the properties be unable to generate sufficient cash flow to pay the Additional Loan interest, it would reduce the Trust's distributable cash flow and could affect the value of the Additional Loan collateral.
There are contractual restrictions on the prepayment of the PIMs and PIMIs. During the first five years of the investment, borrowers are generally prohibited from repayment. During the second five years, the PIM borrowers can prepay the insured mortgage by paying the greater of a prepayment premium or the participation interest due at the time of the prepayment. Similarly, the PIMI borrowers can prepay the insured mortgage and the Additional Loan by satisfying the Preferred Return obligation. The participation features and the Additional Loans are neither insured nor guaranteed. If the prepayment of the PIM or PIMI results from the foreclosure on the underlying property or an insurance claim, the Trust generally would not receive any participation income or any amounts due under the Additional Loan.
On February 13, 2002, the Trust received a prepayment of the Norumbega Subordinated Promissory Note and the Norumbega Pointe Additional Loan note. The Trust received $3,063,000 of Additional Loan principal, $302,877 of Shared Appreciation Interest and $2,280,362 of preferred interest. The Trust received $15,123,167 representing the principal proceeds on the first mortgage note on February 25, 2002. The Trust intends to pay a special dividend of $1.14 per share from the proceeds of the Norumbega Pointe prepayment in the first quarter of 2002.
On July 23, 2001, the Trust received a prepayment of the Seasons Subordinated Promissory Note and the Seasons Additional Loan. The Trust received $4,925,351 of the Additional Loan principal, $462,983 of surplus cash, $2,168,701 of preferred interest, $2,693,326 of contingent interest, $176,908 of unpaid Base Interest on Additional Loan and $3,325,696 which represents the Trust's portion of the residual split. The Trust received $21,926,006 representing the principal proceeds on the first mortgage note on July 26, 2001. In addition, the Trust recognized $624,023 of Additional Loan interest that had been previously received and recorded in deferred income on additional loans. The Advisor paid a special dividend of $1.95 per share on August 17, 2001 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.
In November 1999, the Trust notified the borrower on the Falls at Hunters Pointe PIMI that he was in default for non-payment of participating interest due to the Trust based on 1997 and 1998 operating results. The borrower failed to cure the default. Consequently, the Trust elected to use a portion of the borrower's funds held in escrow to cure the 1997 portion of the default. The Borrower remained in default for 1998 and 1999 operating results. The Trust filed a complaint against the partners of the borrowing entity to collect the delinquent participation interest related to 1998 and 1999 operations along with late payment penalties and legal fees. In response to this action, the borrower on the PIMI put the property up for sale. During the first quarter of 2001, the Trust received a payoff of the Falls at Hunters Pointe PIMI as a result of the sale of the property. The Trust received the outstanding balance on the insured mortgage of $12,347,267, the outstanding balance on the Additional Loan of $650,000, Participating Income Interest on the Additional Loan of $496,207 (including all of the delinquent amounts), Preferred Interest on the Additional Loan of $492,543, Participating Appreciation Interest under the subordinate loan agreement of $1,070,304 and late fees on the delinquent Participating Income Interest of $11,021. In addition, the Trust recognized $196,710 of additional loan interest and $311,132 of Participating Income Interest that had been previously received and recorded in deferred income on additional loans. On March 20, 2001, the Trust paid a special dividend of $.83 per share from the proceeds of the Falls at Hunters Pointe PIMI payoff.
In addition to the amounts received from the payoffs of the Seasons and Hunters Pointe PIMIs, the Trust received both installments of Additional Loan interest due in 2001 from five of the PIMI investments. During 1999, the Advisor determined that the borrower on the Norumbega PIMI had paid Additional Loan interest from funds other than surplus cash, which resulted in overpayments during the previous three years. The overpayment was credited to the borrower when the loan was prepaid.
On December 16, 1999, the Trust received $2,832,907 from Windsor Lake; consisting of $2,000,000 from the payoff of the Additional Loan, $40,000 of Additional Loan interest, and $792,907 of participation interest. The payoff of the balance on the insured mortgage, $9,172,642 was received on January 26, 2000. The Trust paid a special dividend of $.66 per Share from the prepayment proceeds.
On October 18, 1999, the Trust received a payoff of $12,399,164 from the Estates MBS consisting of an insured mortgage of $11,375,380 and a prepayment premium of $1,023,784. During October 1999, the Trust paid a special dividend of $.68 per Share from the proceeds received from the Estates MBS payoff.
The Trust has the option to call certain PIMs and all the PIMIs by accelerating their maturity if the loans are not prepaid by the tenth year after permanent funding. The Advisor will determine the merits of exercising the call option for each PIM and PIMI as economic conditions warrant. Such factors as the condition of the asset, local market conditions, the interest rate environment and available financing will have an impact on these decisions.
Critical Accounting Policies
The Trust's critical accounting policies relate primarily to revenue recognition related to the participation features of the Trust's PIM and PIMI investments as well as the recognition of deferred interest income on the Additional Loans. The Trust's policies are as follows:
Basic interest is recognized based on the stated rate of the Department of Housing and Urban Development ("HUD") Insured Mortgage loan (less the servicer's fee) or the coupon rate of the Fannie Mae MBS. The Trust recognizes interest related to the participation features when the amount becomes fixed and the transaction that gives rise to such amount is consummated. The Trust defers the recognition of Additional Loan interest payments as income to the extent these interest payments are from escrows established with the proceeds of the Additional Loan. When the properties underlying the PIMIs 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 amortizing deferred interest amounts into income over the remaining estimated term of the Additional Loan. During periods where mortgage loans are impaired the Trust suspends amortizing deferred interest.
The Trust also fully reserves the portion of any Additional Loan interest payment satisfied through the issuance of an operating loan and any associated interest due on such operating loan. The Trust will recognize the income related to the operating loan when the borrower repays amounts due under the operating loan.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------
Assessment of Credit Risk
The Trust's investments in insured mortgages and MBS, are guaranteed 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. However, obligations of Fannie Mae are not guaranteed by the U.S. Government. Fannie Mae is one of the largest corporations in the United States and the Secretary of the Treasury of the United States has discretionary authority to lend up to $2.25 billion to Fannie Mae at any time. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represent interests 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. Goverment.
The Trust's Additional Loans have similar risks as those associated with higher risk debt instruments, including: reliance on the owner's operating skills, ability to maintain occupancy levels, control operating expenses, 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.
The Trust's investments also include cash and cash equivalents of approximately $6.2 million of Agency paper, which is issued by Government Sponsored Enterprises with a credit rating equal to the top rating category of a nationally recognized statistical rating organization.
Interest Rate Risk
The Trust's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Trust's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 2001, the Trust's PIMs, PIMIs and MBS comprise the majority of the Trust's assets. Decreases in interest rates may accelerate the prepayment of the Trust's investments. The Trust does not utilize any derivatives or other instruments to manage this risk as the Trust plans to hold all of its investments to expected maturity.
The Trust monitors prepayments and considers prepayment trends, as well as dividend requirements of the Trust, when setting regular dividend policy. For MBS, the fund forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs and PIMIs, the Trust incorporates prepayment assumptions into planning as individual properties notify the Trust of the intent to prepay or as they mature.
The table below provides information about the Trust's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates ("WAIR") by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments.
Expected maturity dates ($ in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value Face Value
Interest-sensitive assets:
MBS $ 1,821 $ 1,557 $ 1,334 $ 1,146 $ 989 $ 8,254 $ 15,101 $ 15,601 WAIR 7.60% 7.60% 7.60% 7.60% 7.60% 7.60% 7.60%
PIMS 422 455 491 529 570 34,823 37,290 37,978 WAIR 7.05% 7.05% 7.05% 7.06% 7.06% 7.06% 7.06%
PIMIS Insured Mortgages 16,301 1,257 1,361 1,472 1,593 63,641 85,625 86,664 WAIR 6.71% 6.71% 6.71% 6.71% 6.71% 6.71% 6.83%
Additional Loans 6,963 4,864 2,290 4,600 - - 18,717 17,655 WAIR 7.00% 7.00% 7.00% 7.00% 0.00% 0.00% 7.04% ---------- ---------- --------- --------- -------- ---------- ---------- ----------
Total Interest- Sensitive Assets $ 25,507 $ 8,133 $ 5,476 $ 7,747 $ 3,152 $ 106,718 $ 156,733 $ 157,898 ========== ========== ========= ========= ======== ========== ========== ========== Operations
The following relates to the operations of the Trust during the years ended December 31, 2001, 2000, and 1999.
(amounts in thousands, except per Share amounts) Years Ended December 31, ------------------------- 2001 2000 1999 ---- ---- ---- Per Per Per Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- Interest on PIMs and PIMIs: Basic interest $ 9,674 $ .52 $ 11,260 $ .61 $ 11,998 $ .66 Additional Loan interest 2,208 .12 1,784 .10 1,712 .09 Participation interest 11,873 .64 1,915 .11 1,592 .08 Interest income on MBS 1,197 .07 1,455 .08 3,251 .18 Interest income - cash and cash equivalents 378 .02 564 .03 1,060 .06 Trust expenses (2,081) (.11) (2,215) (.12) (2,274) (.12) Amortization of prepaid fees and expenses (2,608) (.14) (2,132) (.12) (2,365) (.13) Reduction of provision for impaired Additional Loans 1,500 .09 994 .05 - - -------- ------- --------- ------ -------- ------- Net Income $ 22,141 $ 1.21 $ 13,625 $ .74 $ 14,974 $ .82 ======== ======= ========= ====== ========= =======
Weighted Average Shares Outstanding 18,371,477 18,371,477 18,371,477 =========== ========== ==========
The Trust's net income increased in 2001 when compared to 2000 primarily due to increases in Additional Loan and participation interest on PIMs and PIMIs and decreases in asset management fees and the provision for impaired mortgage loan. This was partially offset by a decrease in basic interest from PIMs and PIMIs and increases in amortization expense and general and administrative expenses. Additional Loan and participation interest increased primarily due to the Seasons payoff in July 2001 and the Falls at Hunters Pointe payoff in March 2001. Asset management fees decreased due to the decrease in the Trust's investments as a result of the payoffs mentioned above. The provision for impaired mortgage decreased due to the reduction of the impairment provision for the Windmill Lakes Additional Loan. The payoffs also caused basic interest from PIMs and PIMIs to decrease and amortization expense to increase as the prepaid fees and expenses associated with these PIMIs were fully amortized. General and administrative expenses increased due to an increase in legal fees associated with the research related to the classification of income for REIT purposes.
The Trust's net income decreased $1.3 million for 2000 when compared to 1999 due primarily to lower interest income. Basic interest on PIMs and PIMIs decreased due to the payoff of the Windsor Lake PIMI in January of 2000. MBS interest decreased due to the payoff of the Estates MBS in 1999 and the receipt of a $1.0 million prepayment premium at payoff. Amortization expense in 2000 decreased because the Trust fully amortized the remaining prepaid acquisition costs and participating servicing fees related to the Windsor Lake PIMI payoff. The Trust reversed its provision for impaired mortgage loans, associated with the Oasis additional loan, by $994,000 as a result of improved property operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------
See Appendix A to this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------
Information as to the Trustees and Executive Officers of Krupp Government Income Trust II is as follows:
Position with Krupp Date of Term Name and Age Government Income Trust II Election Expires ------------ -------------------------- -------- -------
Douglas Krupp (55) Chairman of Board of Trustees and Trustee May, 1996 May, 2002 * Charles N. Goldberg (60) Trustee April, 1991 May, 2002 * J. Paul Finnegan (77) Trustee April, 1991 May, 2002 * Stephen Puleo (67) Trustee February, 2001 May, 2002 Robert A. Barrows (44) Treasurer August, 1995 N/A Scott D. Spelfogel (41) Clerk November, 1991 N/A MaryBeth Bloom (28) 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 acquisitions, property management, investment sponsorship, venture capital investing, mortgage banking, financial management, and ownership of two operating companies through private equity investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969 and he has served as the Chief Executive Officer since 1992. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989.
Charles N. Goldberg is currently a partner of Oppel, Goldberg and Saenz, LLC. Prior to that he was of counsel to the law firm of Broocks, Baker and Lange, L.L.P., a position he held from December of 1997 to May, 2000. Prior to joining Broocks, Baker and Lange, L.L.P., Mr. Goldberg was a partner in the law firm of Hirsch and Westheimer from March of 1996 to December of 1997. Prior to Hirsch and Westheimer, he was the Managing Partner of Goldberg Brown, Attorneys at Law from 1980 to March of 1996. He received a B.B.A. degree and a J.D. degree from the University of Texas. He is a member of the State Bar of Texas and is admitted to practice before the U.S. Court of Appeals, Fifth Circuit and U.S. District Court, Southern District of Texas. He currently serves as a Trustee of Krupp Government Income Trust and Krupp Government Income Trust II.
J. Paul Finnegan retired as a partner of Coopers and 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 from Bentley College. Mr. Finnegan currently serves as a Trustee of Krupp Government Income Trust and Krupp Government Income Trust II and a director at Scituate Federal Savings Bank.
Stephen Puleo is currently engaged in business as a consultant and director. He retired as a director of Coopers and Lybrand, an international accounting and consulting firm where he worked from 1995 to 1997 primarily servicing real estate industry clients. From 1993 to 1994, Mr. Puleo was a tax director for Deloitte and 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 and Lybrand where he provided various real estate services and was a senior tax partner in charge of the Northeast Region. He is a graduate of McNeese State University and attended the Executive Development Program at the Tuck School of Business at Dartmouth College. He is a Certified Public Accountant and currently serves as director of Simpson Housing Limited Partnership of Denver, Colorado. He currently serves as a Trustee of Krupp Government Income Trust and Krupp Government Income Trust II.
Robert A. Barrows is the Treasurer of the Trust and is Senior Vice President and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has held several positions within The Berkshire Group since joining the company in 1983 and is currently responsible for accounting, financial reporting and treasury functions for Berkshire Mortgage Finance. Prior to joining The Berkshire Group, he was an audit supervisor for Coopers and Lybrand L.L.P. in Boston. He received a B.S. degree from Boston College and is a Certified Public Accountant.
Scott D. Spelfogel is the Clerk of the Trust and is 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 57) is the Co-Founder and Co-Chairman of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, investment sponsorship, venture capital investing, mortgage banking, financial management, and ownership of two operating companies through private equity investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish High School in Waltham, Massachusetts since September of 1997. Mr. Krupp attended the University of Pennsylvania and Harvard University and holds a Master's Degree in History from Brown University. Douglas and George Krupp are brothers.
Peter F. Donovan (age 48) is Chief Executive Officer of Berkshire Mortgage Finance which position he has held since January of 1998 and in this capacity, he oversees the strategic growth plans of this mortgage banking firm. Berkshire Mortgage Finance is the 10th largest in the United States based on servicing and asset management of a $14.1 billion loan portfolio. Previously he served as President of Berkshire Mortgage Finance from January of 1993 to January of 1998 and in that capacity he directed the production, underwriting, servicing and asset management activities of the firm. Prior to that, he was Senior Vice President of Berkshire Mortgage Finance and was responsible for all participating mortgage originations. Before joining the firm in 1984, he was Second Vice President, Real Estate Finance for Continental Illinois National Bank and Trust, where he managed a $300 million construction loan portfolio of commercial properties. Mr. Donovan received a B.A. from Trinity College and an M.B.A. degree from Northwestern University. Mr. Donovan is currently a member of the Advisory Council for Fannie Mae.
Ronald Halpern (age 60) is President and Chief Operating Officer of Berkshire Mortgage Finance. He has served in these positions since January of 1998 and in this capacity, he is responsible for the overall operations of the Company. Prior to January of 1998, he was Executive Vice President, managing the underwriting, closing, portfolio management and servicing departments for Berkshire Mortgage Finance. Before joining the firm in 1987, he held senior management positions with the Department of Housing and Urban Development in Washington D.C. and several HUD regional offices. Mr. Halpern has over 30 years of experience in real estate finance which includes his experience as prior Chairman of the MBA Multifamily Housing Committee. He holds a B.A. degree from the University of the City of New York and J.D. degree from Brooklyn Law School.
Carol J.C. Mills (age 52) is Senior Vice President for Loan Management of Berkshire Mortgage Finance and in this capacity, she is responsible for the Loan Servicing and Asset Management functions of Berkshire Mortgage Finance. She manages the estimated $14.1 billion portfolio of loans. Ms. Mills joined Berkshire in December 1997 as Vice President and was promoted to Senior Vice President in January 1999. From January 1989 through November 1997, Ms. Mills was Vice President of First Winthrop Corporation and Winthrop Financial Associates, in Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke College and a Master of Architecture degree from Harvard University. Ms. Mills is a member of the Real Estate Finance Association, New England Women in Real Estate, the Mortgage Bankers Association and the Servicing Advisory Council for Freddie Mac.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION -------
Except for the Independent Trustees as described below, the Trustees and Officers of the Trust have not been and will not be compensated by the Trust for their services. However, the Officers will be compensated by the Advisor or an affiliate of the Advisor.
Compensation of Trustees
The Trust paid each of the Independent Trustees (Charles N. Goldberg, J. Paul Finnegan and Stephen Puleo) a fee of $25,000 in 2001.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------
As of January 8, 2002, no person owned of record or was known by the Advisor to own beneficially more than 5% of the Trust's 18,371,477 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.
Class of Name of Beneficial Amount and Nature of Percent Stock Owner Beneficial Interest of Class
Shares of Douglas Krupp Beneficial One Beacon Street Interest Boston, MA 02108 10,000 Shares** ***
Shares of Beneficial Interest All Directors and Officers 10,000 Shares ***
** Mr. Krupp is a beneficial owner of the 10,000 shares held by Berkshire Mortgage Advisors Limited Partnership, the Advisor to the Company, by virtue of being a director of Berkshire Funding Corporation, the general partner of Berkshire Mortgage Advisors Limited Partnership. In each case where Mr. Krupp is a beneficial owner of shares he has shared voting and investment powers.
*** The amount owned does not exceed one percent of the shares of beneficial interest of the Trust outstanding as of January 8, 2002.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------
See Note G to Financial Statements included in Appendix A of this report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------
(a) 1. Financial Statements - see Index to Financial Statements and Supplementary Data included under Item 8, Appendix A, on page of this report.
2. Financial Statement Schedules - see Index to Financial Statements and Supplementary Data included under Item 8, Appendix A, on page of this report. All 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
The Trust did not file any reports on Form 8-K during the quarter ended December 31, 2001.
(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) Fourth Amended and Restated Declaration of Trust filed with The Massachusetts Secretary of State on September 25, 1991 [Included as Exhibit 4.8 to Post-effective Amendment No. 1 to Registrant's Registration Statement on Form S-11 dated September 26, 1991 (File No. 33-39033)].*
(4.2) Subscription Agreement Specimen [Included as Exhibit C to Prospectus included in Post-effective Amendment No. 1 to Registrant's Registration Statement on Form S-11 dated September 26, 1991 (File No. 33-39033)].*
(10) Material Contracts
(10.1) Advisory Services Agreement dated September 11, 1991 between Krupp Government Income Trust II and Berkshire Realty Advisors Limited Partnership (formerly known as Krupp Realty Advisors Limited Partnership)[Exhibit 10.1 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.2) Assignment and Assumption Agreement between Berkshire Realty Advisors Limited Partnership and Berkshire Mortgage Advisors Limited Partnership [Exhibit 10.2 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
Mequon Trails
(10.3) Supplement to Prospectus dated January 1, 1993 for Federal National Mortgage Association pool number MX-073025 [Exhibit 19.1. to Registrant's Report on Form 10-Q for the quarter ended March 31, 1993 (File No. 0-20164)].*
(10.4) Subordinated promissory note dated December 21, 1992 by and between Mequon Trails Townhomes Limited Partnership and Krupp Government Income Trust II [Exhibit 19.2 to Registrant's Report on Form 10-Q for the quarter ended March 31, 1993 (File No. 0-20164)].*
(10.5) Subordinate Multifamily Mortgage dated December 21, 1992 between Mequon Trails Townhomes Limited Partnership and Krupp Government Income Trust II. [Exhibit 10.5 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.6) Subordination Agreement dated December 21, 1992 between Krupp Mortgage Company L.P., Krupp Government Income Trust II and Mequon Trails Townhomes Limited Partnership. [Exhibit 10.6 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
Martin's Landing
(10.7) Subordinated Loan Agreement, dated November 9, 1993, between TRC Realty Incorporated - ML, ML Associates Limited Partnership ("Borrower") and Krupp Government Income Trust II ("Holder") [Exhibit 10.9 to Registrant's annual report on Form 10-K for fiscal year ended December 31, 1993 (File No. 0-20164)].*
(10.8) Subordination Agreement dated November 9, 1993 between ML Associates, L.P., and Krupp Government Income Trust II. [Exhibit 10.22 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.9) Assignment of Subordination Agreement dated November 9, 1993 from Berkshire Mortgage Finance Limited Partnership to the Federal National Mortgage Association by and between ML Associates, L.P., Berkshire Mortgage Finance Limited Partnership and Krupp Government Income Trust II. [Exhibit 10.23 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.10) Supplement to Prospectus dated December 1, 1993 for Federal National Mortgage Association pool number MX - 073029. [Exhibit 10.24 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
Crossings Village
(10.11) Subordinated Loan Agreement, dated September 28, 1993 between Crossings Village Westlake Associates ("Borrower") and Krupp Government Income Trust II ("Holder")[Exhibit 10.10 to Registrant's annual report on Form 10-K for fiscal year ended December 31, 1993 (File No. 0-20164)].*
(10.12) Subordinated Note dated September 28, 1993 between Crossings Village Westlake Associates and Krupp Government Income Trust II [Exhibit 10.16 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.13) Subordination Agreement dated September 28, 1993 between Washington Capital DUS Inc., Crossings Village Westlake Associates and Krupp Government Income Trust II. [Exhibit 10.27 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
Sunset Summit
(10.14) Subordinated Loan Agreement dated November 24, 1993 between Sunset Summit Limited Partnership and Krupp Government Income Trust II [Exhibit 10.21 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.15) Subordinated Note dated November 24, 1993 between Sunset Summit Limited Partnership and Krupp Government Income Trust II [Exhibit 10.22 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.16) Subordination Agreement dated November 24, 1993 between BMFLP, Sunset Summit Limited Partnership and Krupp Government Income Trust II [Exhibit 10.23 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.17) Assignment of Subordination Agreement dated November 24, 1993 from Berkshire Mortgage Finance Limited Partnership to the Federal National Mortgage Association by and between Sunset Summit Limited Partnership, Berkshire Mortgage Finance Limited Partnership and Krupp Government Income Trust II [Exhibit 10.24 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.18) Subordinate Multifamily Mortgage Agreement dated November 24, 1993 between Sunset Summit Limited Partnership and Krupp Government Income Trust II [Exhibit 10.25 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.19) Supplement to Prospectus dated January 1, 1994 for Federal National Mortgage Association pool number MX - 073030 [Exhibit 10.26 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
Oasis at Springtree
(10.20) Subordinate Note dated June 16, 1994 between Oasis at Springtree, Inc. and Krupp Government Income Trust II [Exhibit 10.33 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
(10.21) Subordinated Loan Agreement dated August 11, 1994 between Joseph Kodsi and Albert Kodsi, Oasis at Springtree, Inc., and Krupp Government Income Trust II. [Exhibit 10.48 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.22) Subordination Agreement dated August 11, 1994 between Berkshire Mortgage Finance Limited Partnership, Oasis at Springtree, Inc. and Krupp Government Income Trust II. [Exhibit 10.49 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File. No 0-20164)].*
(10.23) Assignment of Subordination Agreement dated August 11, 1994 for Berkshire Mortgage Finance Limited Partnership with Federal National Mortgage Association by and between Oasis at Springtree, Inc., Berkshire Mortgage Finance Limited Partnership and Krupp Government Income Trust II. [Exhibit 10.50 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.24) Subordinated Multifamily Mortgage Assignment of Rents and Security Agreement dated August 11, 1994 between Oasis at Springtree, Inc. and Krupp Government Income Trust II. [Exhibit 10.51 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.25) Supplement to Prospectus dated January 1, 1994 for Federal National Mortgage Association pool number MX - 073043. [Exhibit 10.52 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
The Willows
(10.26) Supplement to Prospectus dated January 1, 1994 for Federal National Mortgage Association pool number MX - 073057 [Exhibit 10.42 to Registrant's report on Form 10-K for the year ended December 31, 1994 (File No. 0-20164)].*
Windmill Lakes
(10.27) Subordinated Loan Agreement dated February 3, 1995 between Robert B. Kramer and Rose Berger, Windmill Lakes, Inc., and Krupp Government Income Trust II [Exhibit 10.1 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.28) Subordinate Note dated February 3, 1995 between Windmill Lakes, Inc., and Krupp Government Income Trust II [Exhibit 10.2 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.29) Subordinate Multifamily Mortgage Agreement dated February 3, 1995 between Windmill Lakes, Inc., and Krupp Government Income Trust II [Exhibit 10.3 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.30) Subordination Agreement dated February 3, 1995 by and among Green Park Financial Limited Partnership, Krupp Government Income Trust II and Windmill Lakes, Inc. [Exhibit 10.4 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
The Lakes
(10.31) Subordinated Loan Agreement dated June 29, 1995, between Lake Associates, L. P. and Krupp Government Income Trust II [Exhibit 10.5 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.32) Subordinate Note dated June 29, 1995, between Lake Associates, L. P. and Krupp Government Income Trust II [Exhibit 10.6 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.33) Subordinate Multifamily Mortgage to Secure Debt Agreement dated June 29, 1995, between Lake Associates, L. P. and Krupp Government Income Trust II [Exhibit 10.7 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.34) Subordination Agreement dated June 29, 1995, between Berkshire Mortgage Finance Limited Partnership, Lake Associates, L. P. and Krupp Government Income Trust II [Exhibit 10.8 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.35) Assignment of Subordination Agreement dated June 29, 1995, from Berkshire Mortgage Finance Limited Partnership to the Federal National Mortgage Association by and between, Lake Associates, L.P. and Berkshire Mortgage Finance Limited Partnership and Krupp Government Income Trust II [Exhibit 10.9 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.36) Supplement to Prospectus dated November 1, 1994 for Federal National Mortgage Association pool number MX - 073149 [Exhibit 10.10 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].* The Fountains
(10.37) Subordinated Promissory Note dated April 24, 1995 between CSM Fountains Limited Partnership and Krupp Government Income Trust II [Exhibit 10.11 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.38) Agreement Re: Subordinated Note dated April 24, 1995 between Berkshire Mortgage Finance Corporation and Krupp Government Income Trust II [Exhibit 10.12 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
(10.39) Subordinated Multifamily Mortgage Assignment of Rents and Security Agreement dated April 24, 1995 between CSM Fountains Limited Partnership and Krupp Government Income Trust II [Exhibit 10.13 to Registrant's report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-20164)].*
Rivergreens Apartments
(10.40) Mortgage Note dated August 19, 1993 between Rivergreens Associates II Limited Partnership and Krupp Mortgage Company Limited Partnership. [Exhibit 10.98 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.41) Subordinated Promissory Note, dated August 19, 1993, between Rivergreens Associates II Limited Partnership and Krupp Government Income Trust. [Exhibit 10.99 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.42) Subordinated Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated August 19, 1993 between Rivergreens Associates II Limited Partnership and Krupp Government Income Trust II. [Exhibit 10.100 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
Mill Pond II Apartments
(10.43) Mortgage Note dated July 26, 1994 for Mill Pond II Limited Partnership and Krupp Mortgage Company Limited Partnership. [Exhibit 10.101 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.44) Multifamily Subordinated Mortgage, Assignment of Rents and Security Agreement dated July 26, 1994 between Mill Pond II Limited Partnership and Krupp Government Income Trust II. [Exhibit 10.102 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.45) Subordinated Promissory Note, dated July 26, 1994, between Mill Pond II Limited Partnership and Krupp Government Income Trust. [Exhibit 10.103 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
(10.46) Agreement re Subordinated Note dated July 26, 1994, between Berkshire Mortgage Finance Corporation and Krupp Government Income Trust. [Exhibit 10.104 to Registrant's report on Form 10-K for the year ended December 31, 1995 (File No. 0-20164)].*
* Incorporated by reference
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 14th day of March, 2002.
KRUPP GOVERNMENT INCOME TRUST II
By: / s / Douglas Krupp ----------------------------------------- Douglas Krupp, Chairman of Board of Trustees and a Trustee of Krupp Government Income Trust II
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 14th day of March, 2002.
Signatures Title(s)
/s/ Douglas Krupp Chairman of Board of Trustees and a ---------------------------- Douglas Krupp Trustee of Krupp Government Income Trust II
/s/ Robert A. Barrows Treasurer of Krupp Government Income Trust II ---------------------------- Robert A. Barrows
/s/ Charles N. Goldberg Trustee of Krupp Government Income Trust II ---------------------------- Charles N. Goldberg
/s/ J. Paul Finnegan Trustee of Krupp Government Income Trust II -------------------------------- J. Paul Finnegan
/s/ Stephen Puleo Trustee of Krupp Government Income Trust II -------------------------------- Stephen Puleo
APPENDIX A
KRUPP GOVERNMENT INCOME TRUST II
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 2001
KRUPP GOVERNMENT INCOME TRUST II
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
Balance Sheets at December 31, 2001 and 2000
Statements of Income and Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Notes to Financial Statements -
Schedule II - Valuation and Qualifying Accounts
Supplementary Data - Selected Quarterly Financial Data (Unaudited)
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Krupp Government Income Trust II:
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 II (the "Trust") at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP Boston, Massachusetts March 14, 2002
KRUPP GOVERNMENT INCOME TRUST II
BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
2001 2000 ---- ----
Participating Insured Mortgage Investments ("PIMIs")(Notes B, C and I) Insured mortgages $ 85,625,185 $121,208,064 Additional loans, net of impairment provision of $500,000 and $2,000,000, respectively 17,654,500 22,292,351 Participating Insured Mortgages ("PIMs") (Notes B, D and I) 37,239,922 37,631,330 Mortgage-Backed Securities ("MBS") (Notes B, E and I) 15,600,964 19,124,031 ------------- -------------
Total mortgage investments 156,120,571 200,255,776
Cash and cash equivalents (Notes B and I) 6,453,663 7,089,453 Interest receivable and other assets 1,174,106 1,552,568 Prepaid acquisition fees and expenses, net of accumulated amortization of $7,964,938 and $8,957,065, respectively (Note B) 2,913,250 4,838,771 Prepaid participation servicing fees, net of accumulated amortization of $2,420,697 and $2,711,086, respectively (Note B) 1,102,473 1,784,633 --------------- --------------
Total assets $ 167,764,063 $215,521,201 ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note B) $ 1,242,282 $ 2,503,604 Other liabilities 25,985 53,273 ----------------- ---------------
Total liabilities 1,268,267 2,656,877 -------------- -------------
Shareholders' equity (Notes A, F and J) Common stock, no par value; 25,000,000 Shares authorized; 18,371,477 Shares issued and outstanding 166,214,677 212,783,023
Accumulated comprehensive income (Notes B and E) 281,119 81,301 --------------- --------------- -
Total Shareholders' equity 166,495,796 212,864,324 ------------- ------------
Total liabilities and Shareholders' equity $167,764,063 $215,521,201 ============ =============
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---------------- ---------------- ----------------- Revenues: Interest income - PIMs and PIMIs: Basic interest $ 9,673,656 $ 11,259,617 $ 11,998,012 Additional Loan interest 2,207,942 1,783,933 1,712,260 Participation interest 11,873,054 1,915,557 1,591,932 Interest income - MBS 1,197,120 1,455,367 3,251,078 Interest income - cash and cash equivalents 378,045 563,723 1,059,900 ------------ ------------ ------------
Total revenues 25,329,817 16,978,197 19,613,182 ------------ ------------ -------------
Expenses: Asset management fee to an affiliate (Note G) 1,309,430 1,529,418 1,718,942 Expense reimbursements to affiliates (Note G) 267,554 300,348 276,901 Amortization of prepaid fees and expenses (Note B) 2,607,681 2,131,748 2,365,254 General and administrative (Note G) 504,174 385,879 277,747 Reduction of provision for impaired additional loan (Notes B and C) (1,500,000) (994,000) - ------------ ------------ ------------
Total expenses 3,188,839 3,353,393 4,638,844 ------------ ------------ ------------ -
Net income (Notes B and H) 22,140,978 13,624,804 14,974,338
Other comprehensive income:
Net change in unrealized gain (loss) on MBS 199,818 635,251 (1,101,186) ------------ ------------ ------------
Total comprehensive income $ 22,340,796 $ 14,260,055 $ 13,873,152 ============ ============ ============
Basic earnings per Share $ 1.21 $ .74 $ .82 ============ ============ ============
Weighted average Shares outstanding 18,371,477 18,371,477 18,371,477 ============ ============ ============
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated Total Retained Comprehensive Shareholders' Common Stock Earnings Income (Loss) Equity ------------ ------------- ---------------- --------------------
Balance at December 31, 1998 $ 264,099,856 $ - $ 547,236 $ 264,647,092
Dividends (35,179,844) (14,974,338) - (50,154,182)
Net income - 14,974,338 - 14,974,338
Change in unrealized loss on MBS - - (1,101,186) (1,101,186) -------------- ------------- ----------------- ----------------
Balance at December 31, 1999 228,920,012 - (553,950) 228,366,062
Dividends (16,136,989) (13,624,804) - (29,761,793)
Net income - 13,624,804 - 13,624,804
Change in unrealized gain on MBS - - 635,251 635,251 -------------- ------------- ---------------- ---------------
Balance at December 31, 2000 212,783,023 - 81,301 212,864,324
Dividends (46,568,346) (22,140,978) - (68,709,324)
Net income - 22,140,978 - 22,140,978
Change in unrealized gain on MBS - - 199,818 199,818 -------------- -------------- ---------------- ----------------
Balance at December 31, 2001 $ 166,214,677 $ - $ 281,119 $ 166,495,796 ============== ============= ================ ===============
Shares issued and outstanding for each of the three years in the period ended December 31, are 18,371,477.
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---- ---- ----
Operating activities: Net income $ 22,140,978 $ 13,624,804 $ 14,974,338 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of net premium 75,585 58,017 173,055 Amortization of prepaid fees and expenses 2,607,681 2,131,748 2,365,254 Reduction of provision for impaired additional loans (1,500,000) (994,000) - Changes in assets and liabilities: Decrease in interest receivable and other assets 378,462 76,981 53,333 Decrease in deferred income on Additional Loans (1,261,322) (189,372) (26,367) (Decrease) increase in other liabilities (127,288) 3,248 106,462 -------------- -------------- ---------------
Net cash provided by operating activities 22,314,096 14,711,426 17,646,075 -------------- -------------- ----------------
Investing activities: Principal collections on MBS 3,647,045 2,580,441 19,432,484 Principal collections on Additional Loans 6,137,851 - 2,000,000 Principal collections on PIMs and Insured Mortgages 35,974,542 10,905,706 1,718,718 -------------- -------------- ----------------
Net cash provided by investing activities 45,759,438 13,486,147 23,151,202 -------------- -------------- ----------------
Financing activity: Dividends (68,709,324) (29,761,793) (50,154,182) -------------- -------------- --------------- -
Net decrease in cash and cash equivalents (635,790) (1,564,220) (9,356,905)
Cash and cash equivalents, beginning of period 7,089,453 8,653,673 18,010,578 -------------- -------------- ----------------
Cash and cash equivalents, end of period $ 6,453,663 $ 7,089,453 $ 8,653,673 ============== ============== ================
Non cash activities: Increase (decrease) in Fair Value of MBS $ 199,818 $ 635,251 $ (1,101,186) ============== ============== =============== =
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS -------------
A. Organization
Krupp Government Income Trust II (the "Trust") was formed on February 8, 1991 by filing a Declaration of Trust in The Commonwealth of Massachusetts. The Trust is authorized to sell and issue not more than 25,000,000 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 (the "Advisor") acquired 10,000 of such Shares for $200,000 and 18,315,158 Shares were sold for $365,686,058 net of purchase volume discounts of $617,102 under a public offering which commenced on September 11, 1991 and was completed on February 12, 1993. Under the Dividend Reinvestment Plan ("DRP"), 46,319 Shares were sold for $880,061. The Trust shall terminate on December 31, 2030, 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 No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"), classifies its MBS portfolio as available-for-sale. 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 accounts for its MBS portion of a PIM or PIMI investment in accordance with FAS 115, under the classification of held to maturity. The Trust carries these MBS at amortized cost.
The insured mortgage portion of the Federal Housing Administration ("FHA") PIM or 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 believes there is an impairment in value, in which case a valuation allowance is established in accordance with FAS 114 and FAS 118.
Basic interest is recognized based on the stated rate of the Department of Housing and Urban Development ("HUD") Insured Mortgage loan (less the servicer's fee) or the coupon rate of the Fannie Mae MBS. The Trust recognizes interest related to the participation features when the amount becomes fixed and the transaction that gives rise to such amount is consummated. The Trust defers the recognition of Additional Loan interest payments as income to the extent these interest payments are from escrows established with the proceeds of the Additional Loan. When the properties underlying the PIMIs 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 amortizing 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. Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------
B. Significant Accounting Policies, Continued
PIMs and PIMIs, continued
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 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. Interest received on impaired loans is generally applied against the loan principal.
Cash Equivalents
The Trust includes all short-term investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. The Trust invests its cash primarily in agency paper, and money market funds with a commercial bank and has not experienced any loss to date on its invested cash.
Prepaid Fees and Expenses
Prepaid fees and expenses represent prepaid acquisition fees and expenses and prepaid participation servicing fees paid for the acquisition and servicing of PIMs and PIMIs. The Trust amortizes prepaid acquisition fees and expenses using a method that approximates the effective interest method over a period of ten to twelve years, which represents the estimated life of the underlying mortgage. The prepaid participation servicing fees are amortized 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 loan and at closing if a Fannie Mae loan.
Upon the repayment of a PIM or PIMI, any unamortized acquisition fees and expenses and unamortized participation servicing fees related to such loan are expensed.
Income Taxes
The Trust has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and believes it will continue to meet all such qualifications. Accordingly, the Trust will not be subject to federal income taxes on amounts distributed to shareholders provided it distributes annually at least 95% 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 gain on MBS investments. Actual results could differ from those estimates.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------
C. PIMIs
The Trust had investments in seven PIMIs at December 31, 2001 and nine at December 31, 2000 that provide the permanent financing for multi-family housing. Each PIMI consists of either a Fannie Mae MBS or a sole participation interest in a HUD-insured first mortgage loan originated under the FHA lending program (collectively, the "insured mortgages") and an "Additional Loan" made to the borrower or the owners of the borrower to provide additional funds for the construction or permanent financing of the property. The FHA first mortgage loan and the first mortgage underlying the Fannie Mae MBS provide the borrower with a below market interest rate loan, and in return, the Trust receives a percentage of the cash generated from the property operations ("Participating Income Interest") and a percentage of any appreciation thereafter ("Participating Appreciation Interest") (collectively the "participation interest").
The borrower conveys the participation features to the Trust through a subordinated promissory note and mortgage or a subordinate loan agreement (collectively the "Agreements"). The Trust makes the Additional Loan under the Fannie Mae PIMIs directly to the borrower of the first mortgage loan underlying the Fannie Mae MBS, and the borrower collateralizes the Additional Loan with a subordinated mortgage on the property. The owners of the borrower also pledge their ownership interests in the borrower as additional collateral.
The Trust made the Additional Loans on the FHA PIMIs to the owners of the entity having the FHA first mortgage loan, and the owners collateralize the Additional Loan by pledging their ownership interests in the borrowing entity, their share of any distributions received, and the proceeds realized upon the refinancing of the property, sale of the property or sale of the partnership interests. Unlike the insured mortgages, the Additional Loans are neither guaranteed nor insured.
The Trust receives level monthly payments of principal and interest payments, amortizing over thirty to forty years on the insured mortgages and is also entitled to receive participation interest and semi-annual interest payments ("Additional Loan interest") and preferred interest under the Additional Loans and Agreements. While principal and interest payments on the insured mortgages are insured or guaranteed, there are limitations to the amount and obligation to pay interest under the Additional Loan and Agreements.
The Agreements for Fannie Mae PIMIs entitles the Trust to receive (i) semi-annual interest payments on the Additional Loan, (ii) Participating Income Interest, (iii) Participating Appreciation Interest and (iv) Preferred Interest. Additional Loan interest accrues at the stated interest rate of the Additional Loan and Participating Income Interest represents the Trust's share of the net revenue generated by the property at a stated percentage generally ranging from 25% to 35%. Additional Loan interest and Participating Income Interest are payable only to the extent there is net revenue available to pay these amounts. However, should the borrower be unable to make the full Additional Loan interest payment, the borrower must notify the Trust of the amount of the shortfall.
The Trust can require the partners of the borrower to make a capital call contribution to the borrower to fund 50% of this shortfall, and the Trust will fund the remainder with an Operating Loan. Also, the Trust is generally limited to receiving no more than 50% of net revenue on any semi-annual payment date. Participating Appreciation Interest provides the Trust with a stated percentage, ranging from 25% to 30%, of the excess value of the property over amounts due under the first mortgage, Additional Loan and any Operating Loans, the repayment of capital call contributions, and a return of original equity to the partners of the borrower.
Participating Appreciation Interest is due upon the sale, refinancing, maturity or accelerated maturity, or permitted prepayment of all amounts due under the insured mortgage and Additional Loan. Generally, the Trust will not receive more than 50% of the excess of value over the outstanding indebtedness, the payment of Preferred Interest, and the return of equity and capital call contributions to the partners of the borrower.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------ C. PIMIs, Continued
Preferred Interest refers to a non-compounded cumulative return from the closing date of the loan to the date of calculation, at a stated interest rate generally on the original outstanding balance of the insured mortgage plus the Additional Loan and any other funds advanced to the borrower (reduced by principal payments received) less: (i) interest payments on the insured mortgage, (ii) Additional Loan interest, (iii) Participating Income Interest, and (iv) Participating Appreciation Interest. Generally, the amount of Preferred Interest owed cannot exceed the excess of value over the outstanding indebtedness. Amounts due under the Additional Loan and Agreements are neither insured nor guaranteed.
The Agreements for FHA PIMIs entitle the Trust to receive (i) Participating Income Interest at a stated percentage usually ranging from 25% to 50% of (a) all distributable Surplus Cash generated by the property as defined in the regulatory agreement of the HUD-insured first mortgage loan, (b) unrestricted cash generated by property operations, and (c) unexpended reserves and escrows; and (ii) Participating Appreciation Interest at a stated percentage usually ranging from 20% to 50% of the proceeds or value of the property less the outstanding indebtedness upon the sale, refinancing, maturity or accelerated maturity, or permitted prepayment of all amounts due under the insured mortgage and Additional Loan. Amounts received by the Trust pursuant to this Agreement reduce amounts payable as Base Interest and Preferred Interest under the FHA PIMI Additional Loan.
The FHA PIMI Additional Loan interest is payable from the following sources: (i) any Surplus Cash received as Participating Income Interest, (ii) amounts conveyed to the Trust by the owners of the borrower representing distributions of Surplus Cash, and (iii) amounts in reserve accounts established with Additional Loan proceeds, if available, and any interest earned on these amounts. As with the Fannie Mae PIMIs, the borrower must notify the Trust of the amount of any Additional Loan interest shortfall. At its option the Trust can require the owners of the borrower to make a capital call for 50% of the shortfall and the Trust in certain situations could convert the remaining 50% into an operating loan or would forego the remainder.
The FHA PIMIs also require the payment of Preferred Interest at a stated interest rate from the date of final endorsement to the date of calculation on the original outstanding balance of the insured mortgage plus the Additional Loan and any other funds advanced by the Trust to the borrower or owners of the borrowing entity (reduced by principal payments received) 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 including amounts foregone by the Trust.
The insured mortgage and Agreements generally have maturities of 15 to 40 years, however, under the Agreements the Trust can accelerate the maturity dates at any time after the ninth or tenth anniversary of final endorsement for the FHA PIMIs or the closing date of the Fannie Mae PIMIs, upon giving twelve months written notice for the payment.
If the Trust accelerates the maturity date, the Trust can require payment of all amounts due under the Additional Loan and Agreements through the accelerated maturity date for the payment of amounts due under the Agreement and the HUD-insured first mortgage loan (providing the contract of insurance with the Secretary of HUD is canceled prior to the accelerated maturity date) or prepayment of the first mortgage loan underlying the Fannie Mae MBS.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------
C. PIMIs, Continued
FHA PIMIs generally cannot be prepaid for a term of five years from the construction completion date or final endorsement. After the fifth anniversary of construction completion or final endorsement, the FHA PIMI may be prepaid without penalty providing that all amounts due under the Agreements, Additional Loan and FHA insured mortgage are paid. Fannie Mae PIMIs generally cannot be prepaid during the five years following the closing date of the underlying first mortgage loan. Thereafter, the Fannie Mae first mortgage loan may be prepaid subject to a prepayment penalty that declines each year for the next five years with no prepayment penalty after the tenth year. Any prepayment of a Fannie Mae PIMI generally requires prepayment of the first mortgage loan underlying the Fannie Mae MBS and payment of amounts due under the Agreements and Additional Loan. The Fannie Mae first mortgage loan would not need to be prepaid if there is a permitted assumption of the first mortgage loan, however, amounts due under the Agreement and Additional Loan would need to be prepaid. Any prepayment usually requires not less than 90 nor more than 180 days prior written notice.
On July 25, 2001, the Trust finalized an agreement with the owner of the Windmill Lakes property which will allow for the release of the participation features on the PIMI in the event that the first mortgage, the Additional Loan and any accrued but unpaid base interest on the Additional Loan are repaid by September 1, 2002. In addition, the Trust required the owner to pay current and outstanding Additional Loan base interest as of March 1, 2001 of $512,500. In the event that the required payments are not received by September 1, 2002, the participation features will remain in force. As a result of the performance of the property, the Trust had initially established a valuation allowance of $2,000,000 on the Additional Loan in 1998. The Trust has reflected the $512,500 received plus $50,000 previously received as a reduction in the principal balance of the Additional Loan and related impairment provision. Additionally, based upon improved market conditions and property operations, the Trust has further reduced the impairment provision by $937,500 to $500,000 at December 31, 2001.
On July 23, 2001, the Trust received a prepayment of the Seasons Subordinated Promissory Note and the Seasons Additional Loan. The Trust received $4,925,351 of the Additional Loan principal, $462,983 of surplus cash, $2,168,701 of Preferred Interest, $2,693,326 of contingent interest, $176,908 of Base Interest on Additional Loan and $3,325,696 which represents the Trust's portion of the residual split. The Trust received $21,926,006 representing the principal proceeds on the first mortgage note on July 26, 2001. In addition, the Trust recognized $624,023 of Additional Loan interest that had been previously received and recorded in deferred income on additional loans. The Advisor paid a special dividend of $1.95 per share on August 17, 2001 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.
During the first quarter of 2001, the Trust received a payoff of the Hunters Pointe PIMI. The Trust received the outstanding balance on the insured mortgage of $12,347,267, the outstanding balance on the Additional Loan of $650,000, Participating Income Interest of $496,207 (including all of the delinquent amounts), Preferred Interest of $492,543, Participating Appreciation Interest of $1,070,304 and late fees on the delinquent Participating Income Interest of $11,021. In addition, the Trust recognized $196,710 of additional loan interest and $311,132 of Participating Income Interest that had been previously received and recorded in deferred income on additional loans. On March 20, 2001, the Trust paid a special dividend of $.83 per share from the proceeds of the Hunters Pointe PIMI payoff.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------
C. PIMIs, Continued
On December 16, 1999, the Trust received $2,832,907 from Windsor Lake consisting of $2,000,000 from the payoff of the Additional Loan, $40,000 of Additional Loan interest and $792,907 of participation interest. The payoff of the balance on the insured mortgage, $9,172,642 was received on January 26, 2000. The Trust paid a special dividend of $.66 per Share from the prepayment proceeds on February 18, 2000.
At December 31, 2001 and 2000 there are no insured mortgage loans within the Trust's portfolio that are delinquent as to principal or interest.
The Trust's investments in PIMIs consists of the following at December 31, 2001 and 2000:
Approximate Insured Loan Monthly Interest Maturity Balance Outstanding at December 31, Mortgages Amount Payments Rate Date 2001 2000 --------- ------ -------------- -------- ----------- ---- ----
FHA The Seasons $ 23,224,649 $ - - - $ - $ 22,054,045
Hunters Pointe 12,789,100 - - - - 12,362,037
Norumbega Point 15,598,500 101,100 7.375% 02/01/36 15,139,275 15,231,817
FNMA (a) ---- Crossings Village 12,907,334 82,500 6.75% 10/01/08 11,722,936 11,913,997
Martin's Landing 11,200,000 69,600 6.50% 12/01/08 10,153,225 10,322,038
Sunset Summit 10,192,801 63,400 6.50% 10/01/08 9,246,686 9,400,427
Oasis 12,401,673 79,100 6.75% 07/01/09 11,432,503 11,603,141
Windmill Lakes 11,600,000 74,600 6.825% 03/01/10 10,767,647 10,920,913
The Lakes 18,387,653 118,000 6.825% 07/01/10 17,162,913 17,399,649 ---------------- -------------- ------------- -----------
$ 128,301,710 $ 588,300 85,625,185 $21,208,064 ================ ============== ============= ============ (d)
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued Base Preferred Maturity Interest Interest Additional Loans 2001 2000 Date Rate Rate ---------------- ---- ---- ---- ---- ---- The Seasons $ - $ 4,925,351 - - - Hunters Pointe - 650,000 - - - Norumbega Pointe 3,063,000 3,063,000 07/02/06 7% 10% Crossings Village 2,584,000 2,584,000 10/01/08 7% 9% Martin's Landing 2,280,000 2,280,000 12/01/08 7% 12% Sunset Summit 1,900,000 1,900,000 12/01/08 7% 9%(b) Oasis 2,290,000 2,290,000 09/01/09 7% 9.25% Windmill Lakes (c): Due Contractually 2,000,000 2,000,000 03/01/10 7.5% 9.5% Interest applied (562,500) - ------------- ------------- Carrying Value 1,437,500 2,000,000 The Lakes 4,600,000 4,600,000 07/01/10 7% 9% ------------- -------------
$ 18,154,500 $ 24,292,351 ============= ============= (e) (a) Monthly principal and interest payments are based on a 30-year amortization. The unpaid principal balances due at maturity are as follows:
Crossings Village $ 9,917,000 Martin's Landing $ 8,524,000 Sunset Summit $ 7,763,000 Oasis $ 9,550,000 Windmill Lakes $ 8,907,000 The Lakes $ 14,118,000
(b) The Trust will receive its Additional Loan Interest and its GIT Contingent Interest on Investment (as defined in the Subordinate Loan Agreement) from net revenue up to the 9% Preferred Interest Rate and, thereafter is entitled to 25% of net revenue.
(c) The Trust finalized an agreement on July 25, 2001 with the owner which will allow for the release of the participation features in the event that the first mortgage, the Additional Loan and any accrued but unpaid interest on the Additional Loan are all paid off by September 1, 2002. In the event that the required payments are not received, the participation features will remain in force.
(d) The aggregate cost for federal income tax purposes is $85,625,185.
(e) The aggregate cost for federal income tax purposes is $18,717,000.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------
C. PIMIs, Continued
Impaired Additional Loans
On December 31, 1998, as a result of continued deterioration in property operations, the Advisor of the Trust determined that the Windmill Lakes Additional Loan was impaired. As a result, a valuation allowance of $2,000,000 was established to adjust the carrying amount of the loan to the estimated fair market value of the collateral less anticipated costs of sale. On July 25, 2001, the Trust received $512,500 in accrued but unpaid base interest. The Trust reflected the $512,500 received plus $50,000 previously received as a reduction in the principal balance of the Additional Loan and related impairment provision. During the fourth quarter of 2001, based on improved market conditions and property operations, the Trust reduced the impairment provision by an additional $937,500 to $500,000. The Trust did not receive interest income on the Windmill Lakes Additional Loan during 2000 or 1999 and has not recognized any interest income during 2001, 2000 or 1999.
On December 31, 1998, as a result of continued deterioration in property operations, the Advisor of the Trust determined that the Oasis Additional Loan was impaired. As a result, a valuation allowance of $994,000 was established to adjust the carrying amount of the loan to the estimated fair market value of the collateral less anticipated costs of sale. During 2000, property operations improved and, as a result, the Advisor determined that the Oasis Additional Loan was no longer impaired. Therefore, the valuation allowance was reversed.
The activity in the valuation allowance together with the related recorded and carrying value of the mortgage loans is as follows as of December 31, 2001:
Recorded Valuation Carrying Value Allowance Value -------------- --------- -----------
Windmill Lakes $1,437,500 $ 500,000 $ 937,500 ========== =========== ============
Reconciliations of activity for 2001, 2000 and 1999 are as follows:
Insured Mortgages 2001 2000 1999 ---- ---- ----
Balance at beginning of period $121,208,064 $ 131,750,452 $133,132,325
Principal collections (35,582,879) (10,542,388) (1,381,873) ------------- ------------- ------------
Balance at end of period $ 85,625,185 $ 121,208,064 $131,750,452 ============ ============== ============
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
C. PIMIs, Continued
Additional Loans 2001 2000 1999 ---- ---- ----
Balance at beginning of period $ 22,292,351 $ 21,298,351 $ 23,298,351
Interest received and recognized as Additional Loan prepayment (562,500) - -
Additional Loan prepayments (5,575,351) - (2,000,000)
Adjustment to valuation allowance 1,500,000 994,000 - --------------- -------------- --------------
Balance at end of period $ 17,654,500 $ 22,292,351 $ 21,298,351 =============== ============== ============== =
Property Descriptions: ---------------------
Norumbega Point is a 93-unit assisted living facility in Weston, Massachusetts.
Crossings Village Apartments ("Crossings Village") is a 286-unit apartment complex located in Westlake, Ohio.
Martin's Landing Apartments ("Martin's Landing") is a 300-unit apartment complex in Roswell, Georgia.
Sunset Summit Apartments ("Sunset Summit") is a 261-unit apartment complex located in Portland, Oregon.
Oasis at Springtree ("Oasis") is a 276-unit apartment complex located in Sunrise, Florida.
Windmill Lakes Apartments ("Windmill Lakes") is a 264-unit garden style apartment complex in Pembroke Pines, Broward County, Florida.
The Lakes at Vinings Apartments ("The Lakes") is a 464-unit garden and townhouse style apartment complex in Vinings, Georgia.
D. PIMS ----
The Trust has investments in four PIMs. The Trust's PIMs consist of either a Fannie Mae MBS or a sole participation interest in a HUD-insured first mortgage loan originated under the FHA lending program (collectively the "insured mortgages") and participation interests in the revenue stream and appreciation of the property above specified levels. The borrower conveys these participation features to the Trust generally through a subordinated promissory note and mortgage (the "Agreement"). The Trust receives level monthly principal and interest payments, amortized over thirty to forty years. The Fannie Mae MBS is guaranteed by Fannie Mae, and HUD insures payment of principal and interest on the FHA first mortgage loan.
The borrower generally cannot prepay the insured mortgage during the first five years but may prepay it thereafter subject to a 9% prepayment premium in years six through nine, a 1% prepayment premium in year ten and no prepayment premium thereafter. The Trust may receive interest related to its participation interests in the underlying property, however, these amounts are neither insured nor guaranteed.
Generally, the participation features consist of the following: (i) "Minimum Additional Interest" at rates ranging from .5% to .75% per annum calculated on the unpaid principal balance of the first mortgage on the underlying property, (ii) "Shared Income Interest" ranging from 25% to 30% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent that it exceeds the amount of Minimum Additional Interest received during such month, (iii) "Shared Appreciation Interest" ranging from 25% to 30% of any increase in value of the underlying property in excess of a specified threshold. Payment of participation interest from the operations of the property is limited to 50% of net revenue or surplus cash as defined by Fannie Mae or HUD, respectively. The total amount of participation interest payable by the borrower generally cannot exceed 50% of any increase in value of the property.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
D. PIMs, Continued
Shared Appreciation Interest is payable when one of the following occurs: (1) the sale of the underlying property to an unrelated third party on a date which is later than five years from the date of the Agreement, (2) the maturity date of the Agreement, or (3) prepayment of the Agreement.
Under the Agreement, the Trust, upon giving twelve months written notice, can accelerate the maturity date of the Agreement and insured mortgage to a date not earlier than ten years from the date of the Agreement for (a) the payment of all participation interest due under the Agreement as of the accelerated maturity date or (b) the payment of all participation interest due under the Agreement plus all amounts due on the first mortgage note on the property.
At December 31, 2001 and 2000 there are no insured mortgage loans within the Trust's portfolio that are delinquent of principal or interest.
The Trust's PIMs consisted of the following at December 31, 2001 and 2000:
Approximate Original Monthly Interest Maturity PIM Amount Payments Rate Date Balance Outstanding at December 31, --- ------ --------- ---- ---- -------------------------------------- 2001 2000 ---- ---- FNMA Mequon Trails $14,937,726 $ 93,500 6.50% 01/01/08 $ 13,276,440 $ 13,525,695 (a) FHA Rivergreens II 6,137,199 39,800 7.375% 01/01/35 5,917,280 5,956,517
Mill Ponds II 8,245,300 51,900 7.125% 12/01/35 7,982,225 8,034,349
The Fountains 10,336,000 70,800 7.50% 11/01/36 10,063,977 10,114,769 ------------ ---------- --------------- --------------- (b) Total $ 39,656,225 $ 256,000 $ 37,239,922 $ 37,631,330 ============ ========== =============== =============== (c)
(a) Principal and interest payments are based on a 30-year amortization. Unpaid principal of approximately $11,267,000 is due at maturity. (b) Construction-phase interest rate was 7.875%. Received Final Endorsement in April 1998. (c) The aggregate cost for federal income tax purposes is $37,239,922.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued
------------------
D. PIMs, Continued
Reconciliations of activity for 2001, 2000 and 1999 are as follows:
2001 2000 1999 ---- ---- ----
Balance at beginning of period $ 37,631,330 $ 37,994,412 $ 38,331,257
Discount amortization 255 236 217
Principal collections (391,663) (363,318) (337,062) -------------- -------------- ------------- -
Balance at end of period $ 37,239,922 $ 37,631,330 $ 37,994,412 ============== ============== ==============
Property descriptions:
Mequon Trails Townhomes ("Mequon Trails") is a 246-unit apartment complex located in Mequon, Wisconsin.
Rivergreens II Apartments ("Rivergreens II") is a 126-unit apartment complex in Gladstone, Oregon.
Mill Ponds II Apartments ("Mill Ponds II") is a 150-unit apartment complex in Bellbrook, Ohio.
The Fountains Apartments ("The Fountains") is a 204-unit apartment complex in West Des Moines, Iowa.
E. Mortgage Backed Securities
The Trust received a payoff from The Estates MBS consisting of a first mortgage of $11,375,380 on October 18, 1999. In addition, the Trust received a prepayment premium of $1,023,784. The Trust paid a special dividend of $.68 per Unit from the proceeds on October 27, 1999.
At December 31, 2001 the Trust's MBS portfolio has an amortized cost of $15,319,845 and gross unrealized gains of $281,119. At December 31, 2000, the Trust's MBS portfolio had an amortized cost of $19,042,730 and gross unrealized gains and losses of $134,943 and $53,642, respectively. The MBS have maturities ranging from 2008 to 2031.
Maturity Date Fair Value Unrealized Gain
2002 - 2006 $ - $ - 2007 - 2011 3,622,586 67,189 2012 - 2031 11,978,378 213,930 ------------- --------------
Total $ 15,600,964 $ 281,119 ============= =============
F. Shareholders' Equity
Under the Declaration of Trust, and commencing with the initial closing of the public offering of Shares, the Trust has declared and paid dividends on a quarterly basis. During the period in which the Trust qualifies as a REIT, the Trust has and will pay quarterly dividends aggregating at least 95% of taxable income on an annual basis to be allocated to the shareholders, in proportion to their respective number of shares.
In order for the Trust to maintain its REIT status with respect to the requirements of Share ownership, the Declaration of Trust prohibits any investor from owning, directly or indirectly more than 9.80% of the outstanding Shares and empowers the Trustees to refuse to permit any transfer of Shares which, in their opinion, would jeopardize the status of the Trust as a REIT.
Continued
KRUPP GOVERNMENT INCOME TRUST II
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 expenses 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 administration expenses are legal fees and expenses paid by the Trust to an affiliate. During the three years ended December 31, 2001, 2000, and 1999 these fees totaled $6,276, $1,533 and $778 respectively.
The Trust earned or received $398,549 of base interest from The Seasons in 2001 and $443,282 in 2000 and 1999, respectively (see Note C). In addition, the Trust received $8,780,579 in 2001, $446,574 in 2000 and $392,816 in 1999 related to participating interest income.
H. Federal Income Taxes
The reconciliation of the income reported in the accompanying statement of income with the income reported in the Trust's 2001 federal income tax return follows:
Net income per statement of income $ 22,140,978
Less:Book to tax difference for amortization of prepaid fees and expenses (1,322,819)
Less:Book to tax difference for Additional Loan interest income (1,037,081)
Less:Reduction of provision for impaired mortgage loans (962,500) -------------
Net income for federal income tax purposes $ 18,818,578 ==============
The Trust paid dividends of $3.74 per share during 2001 which represents approximately $1.02 from ordinary income and $2.72 represents a non-taxable dividend for federal income tax purposes.
The basis of the Trust's assets for financial reporting purposes is less than its tax basis by approximately $7,162,000 and $9,423,000 at December 31, 2001 and 2000, respectively. The basis of the Trust's liabilities for financial reporting purposes exceeded its tax basis by approximately $1,242,000 and $2,504,000 at December 31, 2001 and 2000, respectively.
Continued
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, continued ------------------
I. Fair Value Disclosures of Financial Instruments
The Trust uses the following methods and assumptions to estimate the fair value of each class of financial instrument:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of those instruments.
MBS
The Trust estimates the fair value of MBS based on quoted market prices. Based on the estimated fair value determined using these methods and assumptions, the Trust's investments in MBS has gross unrealized gains of approximately $281,000 December 31, 2001 and gross unrealized gains and losses of approximately $135,000 and $54,000 at December 31, 2000.
PIMs and PIMIs
There is no established trading market for these investments. Management estimates the fair value of the PIMs and the insured mortgage portion of the PIMIs using quoted market prices of MBS having the same stated coupon rate as the insured mortgages. Additional Loans are based on the estimated fair value of the underlying properties as an estimate of the fair value of the loan is not practicable. Management does not include any participation income in the Trust's estimated fair values, as Management does not believe it can predict the time of realization of the feature with any certainty.
Based on the estimated fair value determined using these methods and assumptions, the Trust's investments in PIMs and PIMIs had gross unrealized gains of approximately $1,777,000 at December 31, 2001 and gross unrealized gains and losses of approximately $170,000 and $4,052,000, respectively at December 31, 2000.
At December 31, 2001 and 2000, the estimated fair values of the Trust's financial instruments are as follows:
(rounded to thousands) 2001 2000 ------------------------------------------------------ Fair Carrying Fair Carrying Value Value Value Value ------------ ------------- -------------------------
Cash and cash equivalents $ 6,454 $ 6,454 $ 7,089 $ 7,089
MBS 15,601 15,601 19,124 19,124
PIMs and PIMIs: PIMs 37,978 37,240 36,568 37,631 Insured mortgages 86,664 85,625 118,389 121,208 Additional loans 17,655 17,655 22,292 22,292 ---------- ---------- --------- ----------
$ 164,352 $ 162,575 $ 203,462 $ 207,344 ========== ========== ========= ===========
J. Subsequent Event
On February 13, 2002, the Trust received a prepayment of the Norumbega Subordinated Promissory Note and the Norumbega Pointe Additional Loan note. The Trust received $3,063,000 of Additional Loan principal, $302,877 of Shared Appreciation Interest and $2,280,362 of preferred interest. The Trust received $15,123,167 representing the principal proceeds on the first mortgage note on February 25, 2002. The Trust intends to pay a special dividend of $1.14 per share from the proceeds of the Norumbega Pointe prepayment in the first quarter of 2002.
KRUPP GOVERNMENT INCOME TRUST II
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning costs and end of Description of period expenses Recoveries period ----------- --------------- -------------- ------------- ------------------
Valuation Allowance $ 2,000,000 $ - $(1,500,000) $ 500,000 ============ ============ =========== ============
Balance at Charged to Balance at Beginning costs and end of Description of period expenses Recoveries period ----------- --------------- -------------- ------------- ------------------
Valuation Allowance $ 2,994,000 $ - $ (994,000) $ 2,000,000 ============ ============ =========== ===========
Balance at Charged to Balance at Beginning costs and end of Description of period expenses Recoveries period ----------- --------------- -------------- ------------- ------------------
Valuation Allowance $ 2,994,000 $ - $ - $ 2,994,000 ============ ============ =========== ===========
KRUPP GOVERNMENT INCOME TRUST II
SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL DATA (Unaudited) For the Quarter Ended
March 31, June 30, September 30, December 31, 2001 2001 2001 2001 ------------ ------------ --------------- -------------
Total revenues $ 6,360,137 $ 3,476,744 $ 12,808,257 $ 2,684,679 ============ ============ ============ =============
Net income $ 4,926,015 $ 2,516,304 $ 1,911,501 $ 2,787,158 ============ ============= ============ =============
Earnings per Share $ .27 $ .14 $ .64 $ .16 ============ ============ ============ =============
For the Quarter Ended
March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ------------ ------------ ------------ -------------
Total revenues $ 4,908,065 $ 3,954,856 $ 4,031,680 $ 4,083,596 ============ ============ ============ =============
Net income $ 3,585,243 $ 2,894,895 $ 3,003,591 $ 4,141,075 ============ ============ ============ ============
Earnings per Share $ .20 $ .15 $ .17 $ .22 ============ ============ ============ ============
(Unaudited) (Amounts in thousands, except per Share amounts)
Year Inception Ended Through 12/31/01 12/31/01 --------- ------------- Distributable Cash Flow (a): ---------------------------
Net income 22,141 147,591 Items providing or not requiring (not providing) the use of operating funds: Additional Loan Base interest collected and reflected as Reduction of provision for impaired mortgage loan 562 562 Provision for impaired mortgage loans (1,500) 500 Loss on sale of MBS - 1,379 Amortization of prepaid fees and expenses and organization costs 2,608 18,012 Additional Loan interest received and deferred, net (1,262) 1,242 -------- -----------
Total Distributable Cash Flow ("DCF") $ 22,549 $ 169,286 ======== ===========
DCF per Share based on Shares outstanding at December 31, 2001 (18,371,477) $ 1.23 $ 9.21(d) ======== ==========
Dividends:
Total dividends to Shareholders $ 68,708 (b) $ 327,591(c) ========= ===========
Average dividend per Share based on Shares outstanding at December 31, 2001 $ 3.74(b) $ 17.83(c)(d) ======== ============
(a) Distributable Cash Flow consists of income before provision for impaired mortgage loans, amortization of prepaid fees and expenses and organization costs and includes interest collections on Additional Loans which have not been recognized as income for book purposes. The Trust believes Distributable Cash Flow is an appropriate supplemental measure of operating performance, however, it should not be considered as a substitute for net income as an indication of operating performance or cash flows as a measure of liquidity.
(b) Represents all dividends paid in 2001 except the February 2001 quarterly dividend and includes an estimate of the quarterly dividend to be paid in February 2002.
(c) Includes an estimate of the quarterly dividend to be paid in February 2002.
(d) Shareholders average per Share return of capital on a cash basis as of February 2002 is $8.62 [$17.83-$9.21]. Return of capital represents that portion of dividends which is not funded from DCF, such as proceeds from the sale of assets and substantially all of the principal collections received from MBS, PIMs and PIMIs.