FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
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Commission file number 1-11059
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
-----------------------------------------------------
(Exact name of registrant as specified in charter)
California 13-3257662
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)
(301) 816-2300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 31, 2003, 12,079,514 depositary units of limited partnership
interest were outstanding.
2
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 2003 (unaudited) and
December 31, 2002 3
Statements of Income and Comprehensive Income - for the
three months ended March 31, 2003 and 2002 (unaudited) 4
Statement of Changes in Partners' Equity - for the three
months ended March 31, 2003 (unaudited) 5
Statements of Cash Flows - for the three months ended
March 31, 2003 and 2002 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Qualitative and Quantitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Certifications 19
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value
Acquired insured mortgages $ 32,589,641 $ 33,849,089
Originated insured mortgages 15,945,207 15,986,295
------------ ------------
48,534,848 49,835,384
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount and premium:
Acquired insured mortgages 5,007,528 7,176,274
Originated insured mortgages 9,282,681 9,311,907
------------ ------------
14,290,209 16,488,181
Cash and cash equivalents 4,946,952 10,448,516
Receivables and other assets 779,485 1,465,453
Investment in debenture, at fair value 1,812,914 -
------------ ------------
Total assets $ 70,364,408 $ 78,237,534
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 3,896,617 $ 10,181,484
Accounts payable and accrued expenses 285,033 115,799
Due to affiliate 920,903 -
----------- ------------
Total liabilities 5,102,553 10,297,283
----------- ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 71,105,562 73,382,252
General partner's deficit (6,945,692) (6,853,298)
Accumulated other comprehensive income 1,101,985 1,411,297
------------ ------------
Total partners' equity 65,261,855 67,940,251
------------ ------------
Total liabilities and partners' equity $ 70,364,408 $ 78,237,534
============ ============
The accompanying notes are an integral part
of these financial statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended
March 31,
2003 2002
------------ ------------
Income:
Mortgage investment income $ 1,321,225 $ 1,620,471
Interest and other income 24,024 106,204
------------ ------------
1,345,249 1,726,675
------------ ------------
Expenses:
Asset management fee to related parties 163,451 189,781
General and administrative 107,091 98,974
------------ ------------
270,542 288,755
------------ ------------
Net earnings before gains on
mortgage dispositions 1,074,707 1,437,920
Gains on mortgage dispositions 452,826 1,169,159
------------ ------------
Net earnings $ 1,527,533 $ 2,607,079
============ ============
Other comprehensive loss - adjustment to
unrealized gains on investments in insured mortgages (309,312) (1,104,131)
------------ ------------
Comprehensive income $ 1,218,221 $ 1,502,948
============ ============
Net earnings allocated to:
Limited partners - 96.1% $ 1,467,959 $ 2,505,403
General Partner - 3.9% 59,574 101,676
------------ ------------
$ 1,527,533 $ 2,607,079
============ ============
Net earnings per Unit of limited
partnership interest - basic $ 0.12 $ 0.21
============ ============
The accompanying notes are an integral part
of these financial statements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
For the three months ended March 31, 2003
(Unaudited)
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
------------- ------------- ------------- -------------
Balance, December 31, 2002 $ (6,853,298) $ 73,382,252 $ 1,411,297 $ 67,940,251
Net earnings 59,574 1,467,959 - 1,527,533
Adjustment to unrealized gains on
investments in insured mortgages - - (309,312) (309,312)
Distributions paid or accrued of $0.310 per Unit,
including return of capital of $0.190 per Unit (151,968) (3,744,649) - (3,896,617)
------------- ------------- ------------- -------------
Balance, March 31, 2003 $ (6,945,692) $ 71,105,562 $ 1,101,985 $ 65,261,855
============= ============= ============= =============
Limited Partnership Units outstanding - basic, as
of March 31, 2003 12,079,514
==========
The accompanying notes are an integral part
of these financial statements.
6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
March 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net earnings $ 1,527,533 $ 2,607,079
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Gains on mortgage dispositions (452,826) (1,169,159)
Changes in assets and liabilities:
Net decrease in receivables and other assets 91,375 708,321
Increase in accounts payable and accrued expenses 169,234 16,050
Increase (decrease) in due to affiliate 14,447 (42,487)
------------ ------------
Net cash provided by operating activities 1,349,763 2,119,804
------------ ------------
Cash flows from investing activities:
Proceeds from mortgage prepayments 949,721 3,682,282
Proceeds from mortgage assignments 1,469,078 6,759,242
Proceeds from redemption of debenture 744,159 2,385,233
Debenture proceeds paid to affiliate - (1,192,617)
Receipt of mortgage principal from scheduled payments 167,199 158,286
------------ ------------
Net cash provided by investing activities 3,330,157 11,792,426
------------ ------------
Cash flows used in financing activities:
Distributions paid to partners (10,181,484) (1,885,460)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,501,564) 12,026,770
Cash and cash equivalents, beginning of period 10,448,516 4,366,085
------------ ------------
Cash and cash equivalents, end of period $ 4,946,952 $ 16,392,855
============ ============
Non-cash investing activity:
Portion of 7.125% - 7.5% debentures due from a third party in exchange
for the mortgages on Country Club Terrace Apartments,
Nevada Hills Apartments and Dunhaven Apartments $ - $ 3,431,297
6.375% debenture received from HUD in exchange for the mortgage
on Baypoint Shoreline Apartments 1,812,914 -
Portion of 6.375% debenture due to affiliate in exchange
for the mortgage on Baypoint Shoreline Apartments (906,456) -
9% of proceeds due from HUD for the mortgage on Westbrook Apartments 149,566 -
The accompanying notes are an integral part
of these financial statements.
7
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
American Insured Mortgage Investors - Series 85, L.P. (the "Partnership")
was formed pursuant to a limited partnership agreement, as amended,
("Partnership Agreement") under the Uniform Limited Partnership Act of the state
of California on June 26, 1984. During the period from March 8, 1985 (the
initial closing date of the Partnership's public offering) through January 27,
1986 (the termination date of the offering), the Partnership, pursuant to its
public offering of 12,079,389 Depository Units of limited partnership interest
("Units") raised a total of $241,587,780 in gross proceeds. In addition, the
initial limited partner contributed $2,500 to the capital of the Partnership and
received 125 units of limited partnership interest in exchange therefor.
CRIIMI, Inc., a wholly-owned subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"),
acts as the General Partner (the "General Partner") for the Partnership and
holds a partnership interest of 3.9%. The General Partner provides management
and administrative services on behalf of the Partnership. AIM Acquisition
Partners L.P. serves as the advisor (the "Advisor") to the Partnership. The
general partner of the Advisor is AIM Acquisition Corporation ("AIM
Acquisition") and the limited partners include, but are not limited to, The
Goldman Sachs Group, L.P., Sun America Investments, Inc. (successor to Broad,
Inc.) and CRI/AIM Investment, L.P., a subsidiary of CRIIMI MAE, over which
CRIIMI MAE exercises 100% voting control. AIM Acquisition is a Delaware
corporation that is primarily owned by Sun America Investments, Inc. and The
Goldman Sachs Group, L.P.
Pursuant to the terms of certain origination and acquisition services,
management services and disposition services agreements between the Advisor and
the Partnership (collectively the "Advisory Agreements"), the Advisor renders
services to the Partnership, including but not limited to, the management of the
Partnership's portfolio of mortgages and the disposition of the Partnership's
mortgages. Such services are subject to the review and ultimate authority of the
General Partner. However, the General Partner is required to receive the consent
of the Advisor prior to taking certain significant actions, including but not
limited to the disposition of mortgages, any transaction or agreement with the
General Partner or its affiliates, or any material change as to policies
regarding distributions or reserves of the Partnership (collectively the
"Consent Rights"). The Advisor is permitted and has delegated the performance of
services to CRIIMI MAE Services Limited Partnership ("CMSLP"), a subsidiary of
CRIIMI MAE, pursuant to a sub-management agreement (the "Sub-Advisory
Agreement"). The general partner and limited partner of CMSLP are wholly-owned
subsidiaries of CRIIMI MAE. The delegation of such services by the Advisor to
CMSLP does not relieve the Advisor of its obligation to perform such services.
Furthermore the Advisor has retained its Consent Rights.
The General Partner also serves as the General Partner for American Insured
Mortgage Investors ("AIM 84"), American Insured Mortgage Investors L.P. - Series
86 ("AIM 86") and American Insured Mortgage Investors L.P. - Series 88 ("AIM
88") and owns general partner interests therein of 2.9%, 4.9% and 4.9%,
respectively. The Partnership, AIM 84, AIM 86 and AIM 88 are collectively
referred to as the "AIM Limited Partnerships".
Prior to December 1993, the Partnership was engaged in the business of
originating government insured mortgage loans ("Originated Insured Mortgages")
and acquiring government insured mortgage loans ("Acquired Insured Mortgages"
and, together with Originated Insured Mortgages, referred to herein as "Insured
Mortgages"). In accordance with the terms of the Partnership Agreement, the
Partnership is no longer authorized to originate or acquire Insured Mortgages
and, consequently, its primary objective is to manage its portfolio of mortgage
investments, all of which are insured under Section 221(d)(4) or Section 231 of
the National Housing Act of 1937, as amended (the "National Housing Act"). The
Partnership Agreement states that the Partnership will terminate on December 31,
2009, unless terminated earlier under the provisions thereof. The Partnership is
8
required, pursuant to the Partnership Agreement, to dispose of its assets prior
to this date.
2. BASIS OF PRESENTATION
In the opinion of the General Partner, the accompanying unaudited financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Partnership as of March 31, 2003
and the results of its operations and its cash flows for the three months ended
March 31, 2003 and 2002.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") have been condensed or omitted. While the General Partner believes that
the disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the financial
statements and the notes to the financial statements included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 2002.
3. INVESTMENT IN GNMA MORTGAGE-BACKED SECURITIES AND FHA-INSURED CERTIFICATES
Listed below is the Partnership's aggregate investment in GNMA
Mortgage-Backed Securities and FHA-Insured Certificates:
March 31, December 31,
2003 2002
------------ ------------
Acquired Mortgages:
Number of:
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates (1) 16 17
Amortized Cost $ 31,499,950 $ 32,449,759
Face Value 32,017,495 33,076,449
Fair Value 32,589,641 33,849,089
Originated Mortgages:
Number of:
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $ 15,932,912 $ 15,974,329
Face Value 15,932,911 15,974,328
Fair Value 15,945,207 15,986,295
(1) In March 2003, the mortgage on Stonebridge Apartments was prepaid. The
Partnership received net proceeds of approximately $950,000 and recognized
a gain of approximately $93,000 during the three months ended March 31,
2003. A distribution of approximately $0.075 per Unit related to the
prepayment of this mortgage was declared in April and is expected to be
paid to Unitholders in August 2003.
As of May 1, 2003, all of the GNMA Mortgage-Backed Securities and
FHA-Insured Certificates are current with respect to the payment of principal
and interest except for the mortgage on Magnolia Place Apartments, which is
delinquent with respect to the April 2003 payment of principal and interest.
9
The Section 221 Program
-----------------------
There are five Insured Mortgages held by the Partnership, as discussed in
this Note 3 and in Note 4, that have been assigned to HUD under the Section
221(g)(4) program of the National Housing Act (the "Section 221 Program.") A
mortgagee has the right to assign a mortgage ("put") to the United States
Department of Housing and Urban Development ("HUD") at the expiration of 20
years from the date of final endorsement ("Anniversary Date") if the mortgage is
not in default at such time. The mortgagee may exercise its option to put the
mortgage to HUD during the one year period subsequent to the Anniversary Date.
This assignment procedure is applicable to an Insured Mortgage, which had a firm
or conditional commitment for HUD insurance benefits on or before November 30,
1983. Any mortgagee electing to assign an Insured Mortgage to HUD receives, in
exchange therefor, debentures having a total face value equal to (i) the then
outstanding principal balance of the Insured Mortgage (ii) plus accrued interest
on the mortgage to the date of assignment ("Debenture Issuance Date"). These
debentures generally mature 10 years from the date of assignment and bear
interest at a rate announced semi-annually by HUD in the Federal Register
("going Federal rate") at such date. Generally, the Partnership is not the named
mortgagee for the FHA-Insured Certificates. In this case, the HUD debentures are
generally issued to an unrelated third party that is the named mortgagee. The
servicer of the applicable mortgage is responsible for delivering to the
Partnership all HUD insurance claim proceeds. The debenture interest is paid to
the Partnership in the month it is received by the servicer. The debenture
proceeds are paid to the Partnership in the month the debenture is redeemed by
HUD or sold by the servicer. Based on the recommendation of CMSLP, the
sub-advisor, and the consent of the Advisor, the General Partner may elect to
put Insured Mortgages to HUD, based upon, in general, but not limited to, (i)
the interest rates on mortgages, (ii) the interest rates on debentures issued by
HUD and (iii) the costs and risks associated with continuing to hold the Insured
Mortgages.
Once the servicer of an Insured Mortgage has filed an application for
insurance benefits ("HUD put date") under the Section 221 program on behalf of
the Partnership, the Partnership will no longer receive the monthly principal
and interest on the applicable mortgage, and instead, HUD will begin receiving
the monthly principal and interest. HUD issues debentures at the time the
mortgage is assigned to HUD (approximately 30 days after the HUD put date);
however, the debentures are not transferred to the mortgagee until HUD completes
its assignment process of the Insured Mortgage. Based on the General Partner's
experience, HUD's assignment process is generally six to eighteen months. After
HUD completes its assignment process for the Insured Mortgage, HUD transfers to
the mortgagee (i) HUD debentures, as discussed above, (ii) plus cash for accrued
interest on the debentures at the going Federal rate, from the Debenture
Issuance Date to the most current interest payment date. Thereafter, the
mortgagee receives interest on the debentures on the semi-annual payment dates
of January 1 and July 1. The going Federal rate for HUD debentures issued under
the Section 221 Program for the period January 1 through June 30, 2002 was
6.375%; for the period July 1 through December 31, 2002 it was 6.625%; and for
the period January 1 through June 30, 2003 it is 5.75%. The Partnership will
recognize a gain on a mortgage assignment at the time it receives notification
that the assignment has been approved. HUD assignment approval generally occurs
when HUD transfers the debentures to the mortgagee and/or when the Partnership
receives cash for the accrued interest on the debentures. The Partnership
recognizes a loss on a mortgage assignment when it becomes probable that a loss
will be incurred. The gain or loss recognized is generally equal to proceeds
received from HUD, as discussed above, less the amortized cost of the Insured
Mortgage.
Mortgages in the Section 221 HUD assignment process
---------------------------------------------------
The Mortgage on Executive House was put to HUD under the Section 221
Program by the servicer in April 2002. The face value of this mortgage was
approximately $805,000 as of the HUD put date. The Partnership no longer
10
receives monthly principal and interest from mortgages that are put to HUD under
the Section 221 Program. HUD receives the monthly principal and interest and the
Partnership earns semi-annual interest on debentures issued by HUD, as discussed
above. The Partnership has not received approval for this assignment as of May
1, 2003, and will continue to accrue interest on the mortgage until the
debenture is transferred to the Partnership and it begins receiving the
debenture interest. The fair value of this mortgage is included in Investment in
FHA-Insured Certificates and GNMA Mortgage-Backed Securities on the
Partnership's balance sheet as of March 31, 2003 and December 31, 2002.
Redemption of debenture
-----------------------
In January 2003, HUD redeemed the 7.5% debenture of approximately $758,000,
issued in July 2002 for the mortgage on Fairlawn II. A distribution of
approximately $0.06 per Unit related to the debenture proceeds was declared in
February 2003 and was paid to Unitholders in May 2003. The accrued interest of
approximately $28,000 related to this debenture was also received in January
2003 and is being distributed through regular cash flow distributions.
4. INVESTMENT IN FHA-INSURED LOANS
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
March 31, December 31,
2003 2002
------------ -----------
Acquired Loans:
Number of Loans (1)(2) 4 6
Amortized Cost $ 5,007,528 $ 7,176,274
Face Value 5,951,947 8,519,762
Fair Value 5,962,878 8,513,052
Originated Loans:
Number of Loans 2 2
Amortized Cost $ 9,282,681 $ 9,311,907
Face Value 9,033,218 9,059,734
Fair Value 9,349,550 9,470,182
(1) In January 2003, the Partnership received assignment proceeds from HUD for
the mortgage on Westbrook Apartments. The servicer of this mortgage filed a
Notice of Election to Assign in November 2002 as a result of principal and
interest payments being over 60 days delinquent. The Partnership received
net proceeds of approximately $1.5 million, which included 90% of the
unpaid principal balance of this mortgage, plus interest at the debenture
rate of 9.875% from September 2002 through January 2003. The remaining
amount due from HUD is approximately $150,000 (representing 9% of the
unpaid principal balance) and is included in Receivables and other assets
on the Partnership's balance sheet as of March 31, 2003. The Partnership
recognized a gain of approximately $228,000 during the three months ended
March 31, 2003. A distribution of approximately $0.12 per Unit related to
the assignment of this mortgage was declared in February 2003 and was paid
to Unitholders in May 2003.
(2) In February 2003, HUD transferred assignment proceeds to the Partnership in
the form of a 6.375% debenture in exchange for the mortgage on Baypoint
Shoreline Apartments. Since the mortgage on Baypoint Shoreline Apartments
was owned 50% by the Partnership and 50% by AIM 84, approximately $906,000
of the debenture face is due to AIM 84. See further discussion in Note 5.
As of May 1, 2003, all of the Partnership's FHA-Insured Loans were current
with respect to the payment of principal and interest.
11
In addition to base interest payments under Originated Insured Mortgages,
the Partnership is entitled to additional interest based on a percentage of the
net cash flow from the underlying development (referred to as "Participations").
During the three months ended March 31, 2003 and 2002, the Partnership received
additional interest of $0 and $3,228, respectively, from the Participations.
These amounts, if any, are included in mortgage investment income on the
accompanying Statements of Income and Comprehensive Income.
Mortgages in the Section 221 HUD assignment process
---------------------------------------------------
The mortgages on Brougham Estates and College Green Apartments were put to
HUD under the Section 221 Program by the respective servicers in February 2003.
The mortgages on Town Park Apartments and Kaynorth Apartments were put to HUD
under the Section 221 Program by the respective servicers in March and April
2003, respectively. The aggregate face value of these mortgages was
approximately $6.0 million as of the HUD put dates. The Partnership no longer
receives monthly principal and interest from mortgages that are put to HUD under
the Section 221 Program. HUD receives the monthly principal and interest and the
Partnership earns semi-annual interest on debentures issued by HUD, as discussed
above. The Partnership has not received approval for these assignments as of May
1, 2003, and will continue to accrue interest on the mortgages until the
debentures are transferred to the Partnership and it begins receiving the
debenture interest. The amortized cost of these mortgages is included in
Investment in FHA-Insured Loans on the Partnership's balance sheet as of March
31, 2003.
5. INVESTMENT IN DEBENTURE AND DUE TO AFFILIATE
In February 2003, HUD transferred assignment proceeds to the Partnership in
the form of a 6.375% debenture in exchange for the mortgage on Baypoint
Shoreline Apartments. The servicer of this mortgage filed an application for
insurance benefits under the Section 221 Program in June 2002. The debenture,
with a face value of approximately $1.8 million, pays interest semi-annually on
January 1 and July 1 with a maturity date of June 27, 2012. The debenture may be
called by HUD prior to its maturity date. A distribution will be declared after
the debenture proceeds are received by the Partnership. Since the mortgage on
Baypoint Shoreline Apartments was owned 50% by the Partnership and 50% by AIM
84, approximately $906,000 of the debenture face is due to AIM 84. In February
2003, the Partnership received approximately $59,000 in cash of accrued interest
on this debenture. Approximately $29,000 of this accrued interest was
transferred to AIM 84 and the remaining amount will be distributed to the
Partnership's Unitholders through regular cash flow distributions. The
Partnership recognized a gain of approximately $131,000 during the three months
ended March 31, 2003. The fair values of this debenture and the portion due to
AIM 84 are included in Investment in debenture and Due to affiliate,
respectively, on the Partnerships' balance sheet as of March 31, 2003.
12
6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the three months ended March 31, 2003 and 2002 are as follows:
2003 2002
---- ----
Quarter ended March 31, $0.31(1) $1.325(2)
----- ------
$0.31 $1.325
===== ======
The following disposition proceeds are included in the distributions listed
above:
Date Net
Proceeds Type of Proceeds
Complex Name(s) Received Disposition Per Unit
--------------- -------- ----------- --------
(1) Quarter ended March 31, 2003:
Walnut Hills Dec 2002 Prepayment $0.040
Westbrook Apartments Jan 2003 Assignment 0.120
Fairlawn II (redemption of 7.5% debenture) Jan 2003 Assignment 0.060
(2) Quarter ended March 31, 2002:
The Gate House Apartments Dec 2001 Prepayment 0.220
Longleaf Lodge Jan 2002 Prepayment 0.290
Fox Run Apartments (redemption of 7.125% debenture) Jan 2002 Assignment 0.090
Interest on debentures related to mortgages on Summit
Square Manor, Park Place, Park Hill Apts, Fairfax
House, Woodland Villas, Country Club Terrace Apts, Jan - Feb
Dunhaven Apts and Nevada Hills Apts 2002 Assignment 0.060
Summit Square Manor (redemption of 7.125% debenture) Jan 2002 Assignment 0.150
Park Place (redemption of 7.125% debenture) Jan 2002 Assignment 0.060
Park Hill Apartments (redemption of 7.5% debenture) Jan 2002 Assignment 0.140
Fairfax House (redemption of 7.5% debenture) Jan 2002 Assignment 0.170
Woodland Villas (redemption of 7.125% debenture) Jan 2002 Assignment 0.025
The basis for paying distributions to Unitholders is net proceeds from
mortgage and/or debenture dispositions, if any, and cash flow from operations,
which includes regular interest income and principal from Insured Mortgages and
interest on debentures. Although the Insured Mortgages pay a fixed monthly
mortgage payment and the debentures have a fixed semi-monthly interest payment,
the cash distributions paid to the Unitholders will vary during each quarter due
to (1) the fluctuating yields in the short-term money market where the monthly
mortgage payments and debenture interest are temporarily invested prior to the
payment of quarterly distributions, (2) the reduction in the asset base and
monthly mortgage payments resulting from monthly mortgage payments received or
mortgage and debenture dispositions, (3) variations in the cash flow
attributable to the delinquency or default of Insured Mortgages and professional
fees and foreclosure costs incurred in connection with those Insured Mortgages
and (4) variations in the Partnership's operating expenses. As the Partnership
continues to liquidate its mortgage investments and Unitholders receive
distributions of return of capital and taxable gains, Unitholders should expect
a reduction in earnings and distributions due to the decreasing mortgage base.
13
7. TRANSACTIONS WITH RELATED PARTIES
The General Partner and certain affiliated entities earned or received
compensation or payments for services from the Partnership as follows:
COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
-----------------------------------------------
For the
three months ended
March 31,
Name of Recipient Capacity in Which Served/Item 2003 2002
----------------- ----------------------------- ---- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 151,968 $ 649,541
AIM Acquisition Partners, L.P.(2) Advisor/Asset Management Fee 163,451 189,781
CRIIMI MAE Management, Inc.(3) Affiliate of General Partner/Expense Reimbursement 18,235 15,342
(1) The General Partner, pursuant to the Partnership Agreement, is entitled to
receive 3.9% of the Partnership's income, loss, capital and distributions,
including, without limitation, the Partnership's adjusted cash from
operations and proceeds of mortgage prepayments, sales or insurance (as
defined in the Partnership Agreement).
(2) The Advisor, pursuant to the Partnership Agreement, is entitled to an Asset
Management Fee equal to 0.95% of Total Invested Assets (as defined in the
Partnership Agreement). CMSLP, pursuant to the Sub-Advisory Agreement, is
entitled to a fee of 0.28% of Total Invested Assets from the Advisor's
Asset Management Fee. Of the amounts paid to the Advisor, CMSLP earned a
fee equal to $48,172 and $55,945 for the three months ended March 31, 2003
and 2002, respectively. The general partner and limited partner of CMSLP
are wholly owned subsidiaries of CRIIMI MAE.
(3) CRIIMI MAE Management, Inc., an affiliate of the General Partner, is
reimbursed for personnel and administrative services on an actual cost
basis.
14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the
words "believe," "anticipate," "expect," "contemplate," "may," "will," and
similar expressions are intended to identify forward-looking statements.
Statements looking forward in time are included in this Quarterly Report on Form
10-Q pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially.
Accordingly, the following information contains or may contain forward-looking
statements: (1) information included or incorporated by reference in this
Quarterly Report on Form 10-Q, including, without limitation, statements made
under Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations, (2) information included or incorporated by reference in
prior and future filings by the Partnership with the Securities and Exchange
Commission ("SEC") including, without limitation, statements with respect to
growth, projected revenues, earnings, returns and yields on its portfolio of
mortgage assets, the impact of interest rates, costs and business strategies and
plans and (3) information contained in written material, releases and oral
statements issued by or on behalf of, the Partnership, including, without
limitation, statements with respect to growth, projected revenues, earnings,
returns and yields on its portfolio of mortgage assets, the impact of interest
rates, costs and business strategies and plans. Factors which may cause actual
results to differ materially from those contained in the forward-looking
statements identified above include, but are not limited to (i) regulatory and
litigation matters, (ii) interest rates, (iii) trends in the economy, (iv)
prepayment of mortgages, (v) defaulted mortgages, (vi) errors in servicing
defaulted mortgages and (vii) sales of mortgage investments below fair market
value. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only of the date hereof. The Partnership
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
Mortgage Investments
--------------------
As of March 31, 2003, the Partnership had invested in 26 Insured Mortgages
and one debenture with an aggregate amortized cost of approximately $62.6
million, an aggregate face value of approximately $63.8 million and an aggregate
fair value of approximately $64.8 million. Five of these mortgages are in the
Section 221 HUD assignment process as discussed in the Notes to Financial
Statements. During the first quarter of 2003, two mortgages were assigned to HUD
and one prepaid as discussed in "Results of Operations."
In January 2003, HUD redeemed the 7.5% debenture of approximately $758,000,
issued in July 2002 for the mortgage on Fairlawn II. A distribution of
approximately $0.06 per Unit related to the debenture proceeds was declared in
February 2003 and was paid to Unitholders in May 2003. The accrued interest of
approximately $28,000 related to this debenture was also received in January
2003 and is being distributed through regular cash flow distributions.
As of May 1, 2003, all of the Insured Mortgages are current with respect to
the payment of principal and interest, except for the mortgage on Magnolia Place
Apartments, which is delinquent with respect to the April 2003 payment of
principal and interest.
Results of Operations
---------------------
Net earnings decreased by approximately $1.1 million for the three months
ended March 31, 2003, as compared to the corresponding period in 2002, primarily
due to a decrease in gains on mortgage dispositions and mortgage investment
income, as discussed below.
15
Mortgage investment income decreased by approximately $299,000 for the
three months ended March 31, 2003, as compared to the corresponding period in
2002, primarily due to a reduction in the mortgage base. The mortgage base
decreased as a result of ten mortgage dispositions with an aggregate principal
balance of approximately $14.8 million, representing an approximate 19% decrease
in the aggregate principal balance of the total mortgage portfolio since April
2002.
Interest and other income decreased by approximately $82,000 for the three
months ended March 31, 2003, as compared to the corresponding period in 2002,
primarily due to a decrease in debenture interest and due to variations in the
amounts and the timing of the temporary investment of mortgage disposition
proceeds prior to distribution.
Asset management fees decreased by approximately $26,000 for the three
months ended March 31, 2003, as compared to the corresponding period in 2002,
primarily due to the reduction in the mortgage base, as previously discussed.
General and administrative expenses increased by approximately $8,000 for
the three months ended March 31, 2003, as compared to the corresponding period
in 2002, primarily due to an increase in professional fees.
Gains on mortgage dispositions decreased by approximately $716,000 for the
three months ended March 31, 2003, as compared to the corresponding period in
2002. During the first three months of 2003, the Partnership recognized a gain
of approximately $93,000 from the prepayment of the mortgage on Stonebridge
Apartments and gains of approximately $359,000 from the assignment of the
mortgages on Westbrook Apartments and Baypoint Shoreline Apartments. During the
first three months of 2002, the Partnership recognized a gain of approximately
$672,000 from the prepayment of the mortgage on Longleaf Lodge and gains of
approximately $497,000 from the assignment of the mortgages on Country Club
Terrace Apartments, Dunhaven Apartments and Nevada Hills Apartments.
Liquidity and Capital Resources
-------------------------------
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, interest on debentures and cash
receipts from interest on short-term investments, were sufficient for the three
months ended March 31, 2003 to meet operating requirements. The basis for paying
distributions to Unitholders is net proceeds from mortgage and/or debenture
dispositions, if any, and cash flow from operations, which includes regular
interest income and principal from Insured Mortgages and interest on debentures.
Although the Insured Mortgages pay a fixed monthly mortgage payment and the
debentures have a fixed semi-monthly interest payment, the cash distributions
paid to the Unitholders will vary during each quarter due to (1) the fluctuating
yields in the short-term money market where the monthly mortgage payments and
debenture interest are temporarily invested prior to the payment of quarterly
distributions, (2) the reduction in the asset base and monthly mortgage payments
resulting from monthly mortgage payments received or mortgage and debenture
dispositions, (3) variations in the cash flow attributable to the delinquency or
default of Insured Mortgages and professional fees and foreclosure costs
incurred in connection with those Insured Mortgages and (4) variations in the
Partnership's operating expenses. As the Partnership continues to liquidate its
mortgage investments and Unitholders receive distributions of return of capital
and taxable gains, Unitholders should expect a reduction in earnings and
distributions due to the decreasing mortgage base.
Net cash provided by operating activities decreased by approximately
$770,000 for the three months ended March 31, 2003, as compared to the
corresponding period in 2002, primarily due to a decrease in the receipt of
interest previously accrued on mortgages awaiting assignment from HUD under the
Section 221 program and a reduction in mortgage investment income. These
decreases are partially offset by an increase in accounts payable and accrued
16
expenses. The increase in accounts payable and accrued expenses primarily
relates to the timing of the payment of the quarterly asset management fee to
the Advisor.
Net cash provided by investing activities decreased by approximately $8.5
million for the three months ended March 31, 2003, as compared to the
corresponding period in 2002, primarily due to decreases in proceeds received
from mortgage prepayments, mortgage assignments and redemption of debentures.
These decreases were partially offset by debenture proceeds paid to an affiliate
in 2002.
Net cash used in financing activities increased by approximately $8.3
million for the three months ended March 31, 2003, as compared to the
corresponding period in 2002, due to an increase in the amount of distributions
paid to partners in the first three months of 2003 compared to the same period
in 2002.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that there has not been a material change as of
March 31, 2003, in market risk from December 31, 2002 as reported in the
Partnership's Annual Report on Form 10-K as of December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on Form
10-Q, the General Partner carried out an evaluation, under the supervision and
with the participation of the General Partner's management, including the
General Partner's Chairman of the Board and Chief Executive Officer (CEO) and
the Chief Financial Officer (CFO), of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the General Partner's CEO and CFO
concluded that its disclosure controls and procedures are effective and timely
in alerting them to material information relating to the Partnership required to
be included in the Partnership's periodic SEC filings. There were no significant
changes in the General Partner's internal controls or in other factors that
could significantly affect these internal controls subsequent to the date of its
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Purpose
----------- -------
99.1 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 from
Barry S. Blattman, Chairman of the Board,
Chief Executive Officer and President of
the General Partner (Filed herewith).
99.2 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 from
Cynthia O. Azzara, Senior Vice President,
Chief Financial Officer and Treasurer of
the General Partner (Filed herewith).
(b) Reports on Form 8-K
Date
----
March 26, 2003 To report (i) a press release issued on
March 21, 2003 announcing the March 2003
distribution to the Partnership's
Unitholders and (ii) a press release
issued on March 25, 2003 announcing the
Partnership's fourth quarter and year
ended December 31, 2002 financial results.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN INSURED MORTGAGE
INVESTORS L.P. - SERIES 85
(Registrant)
By: CRIIMI, Inc.
General Partner
May 13, 2003 /s/ Cynthia O. Azzara
------------ ----------------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Chief Financial Officer and
Treasurer (Principal Accounting Officer)
19
CERTIFICATION
I, Barry Blattman, Chairman of the Board, Chief Executive Officer and President,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Insured
Mortgage Investors-Series 85, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
AMERICAN INSURED MORTGAGE
INVESTORS - SERIES 85, L.P.
(Registrant)
By: CRIIMI, Inc.
General Partner
Date: May 13, 2003 /s/ Barry S. Blattman
------------ -------------------------------------
Barry S. Blattman
Chairman of the Board,
Chief Executive Officer and President
20
CERTIFICATION
I, Cynthia O. Azzara, Senior Vice President, Chief Financial Officer and
Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Insured
Mortgage Investors-Series 85, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
AMERICAN INSURED MORTGAGE
INVESTORS - SERIES 85, L.P.
(Registrant)
By: CRIIMI, Inc.
General Partner
Date: May 13, 2003 /s/ Cynthia O. Azzara
------------ --------------------------------------
Cynthia O. Azzara
Senior Vice President, Chief Financial
Officer and Treasurer