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 June 30, 2003
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Commission file number 1-11059
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
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(Exact name of registrant as specified in charter)
California 13-3257662
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 June 30, 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 JUNE 30, 2003
Page
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PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 2003 (unaudited) and December 31, 2002 3
Statements of Income and Comprehensive Income - for the three
and six months ended June 30, 2003 and 2002 (unaudited) 4
Statement of Changes in Partners' Equity - for the six months ended
June 30, 2003 (unaudited) 5
Statements of Cash Flows - for the six months ended June 30, 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 15
Item 3. Qualitative and Quantitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
BALANCE SHEETS
June 30, December 31,
2003 2002
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(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value
Acquired insured mortgages $ 30,063,214 $ 33,849,089
Originated insured mortgages 15,960,354 15,986,295
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46,023,568 49,835,384
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount and premium:
Acquired insured mortgages 4,986,775 7,176,274
Originated insured mortgages 9,252,864 9,311,907
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14,239,639 16,488,181
Cash and cash equivalents 3,737,544 10,448,516
Receivables and other assets 1,835,135 1,465,453
Investment in debenture, at fair value 1,812,914 -
------------ ------------
Total assets $ 67,648,800 $ 78,237,534
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 3,205,282 $ 10,181,484
Accounts payable and accrued expenses 126,350 115,799
Due to affiliate 1,097,224 -
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Total liabilities 4,428,856 10,297,283
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Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 69,296,174 73,382,252
General partner's deficit (7,019,122) (6,853,298)
Accumulated other comprehensive income 942,892 1,411,297
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Total partners' equity 63,219,944 67,940,251
------------ ------------
Total liabilities and partners' equity $ 67,648,800 $ 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 For the six months ended
June 30, June 30,
2003 2002 2003 2002
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Income:
Mortgage investment income $ 1,262,635 $ 1,579,485 $ 2,583,860 $ 3,199,956
Interest and other income 39,858 88,082 63,882 194,286
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1,302,493 1,667,567 2,647,742 3,394,242
------------ ------------ ------------ ------------
Expenses:
Asset management fee to related parties 157,123 191,725 320,574 381,506
General and administrative 115,950 123,362 223,041 222,336
------------ ------------ ------------ ------------
273,073 315,087 543,615 603,842
------------ ------------ ------------ ------------
Net earnings before gains on
mortgage dispositions 1,029,420 1,352,480 2,104,127 2,790,400
Gains on mortgage dispositions 293,044 8,768 745,870 1,177,927
------------ ------------ ------------ ------------
Net earnings $ 1,322,464 $ 1,361,248 $ 2,849,997 $ 3,968,327
============ ============ ============ ============
Other comprehensive (loss) income - adjustment to
unrealized gains on investments in insured mortgages (159,093) 1,911,262 (468,405) 807,131
------------ ------------ ------------ ------------
Comprehensive income $ 1,163,371 $ 3,272,510 $ 2,381,592 $ 4,775,458
============ ============ ============ ============
Net earnings allocated to:
Limited partners - 96.1% $ 1,270,888 $ 1,308,159 $ 2,738,847 $ 3,813,562
General Partner - 3.9% 51,576 53,089 111,150 154,765
------------ ------------ ------------ ------------
$ 1,322,464 $ 1,361,248 $ 2,849,997 $ 3,968,327
============ ============ ============ ============
Net earnings per Unit of limited
partnership interest - basic $ 0.11 $ 0.11 $ 0.23 $ 0.32
============ ============ ============ ============
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 six months ended June 30, 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 111,150 2,738,847 - 2,849,997
Adjustment to unrealized gains on
investments in insured mortgages - - (468,405) (468,405)
Distributions paid or accrued of $0.565 per Unit,
including return of capital of $0.335 per Unit (276,974) (6,824,925) - (7,101,899)
------------- ------------- ------------- -------------
Balance, June 30, 2003 $ (7,019,122) $ 69,296,174 $ 942,892 $ 63,219,944
============= ============= ============= =============
Limited Partnership Units outstanding - basic, as
of June 30, 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 six months ended
June 30,
2003 2002
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Cash flows from operating activities:
Net earnings $ 2,849,997 $ 3,968,327
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gains on mortgage dispositions (745,870) (1,177,927)
Changes in assets and liabilities:
Net (increase) decrease in receivables and other assets (4,049) 694,138
Increase in accounts payables and accrued expenses 10,551 25,527
Increase (decrease) in due to affiliate 41,202 (42,487)
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Net cash provided by operating activities 2,151,831 3,467,578
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Cash flows from investing activities:
Proceeds from mortgage prepayments 2,674,487 4,834,522
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 327,574 384,095
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Net cash provided by investing activities 5,215,298 13,170,475
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Cash flows used in financing activities:
Distributions paid to partners (14,078,101) (18,540,360)
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Net decrease in cash and cash equivalents (6,710,972) (1,902,307)
Cash and cash equivalents, beginning of period 10,448,516 4,366,085
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Cash and cash equivalents, end of period $ 3,737,544 $ 2,463,778
============ ============
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
Portion of 6.375% debenture due from a third party in exchange
for the mortgage on The Executive House 810,660
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 299,132 -
Portion of Westbrook Apartments proceeds due to affiliate (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
required, pursuant to the Partnership Agreement, to dispose of its assets prior
to this date.
8
2. BASIS OF PRESENTATION
The Partnership's financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 June 30, 2003,
the results of its operations for the three and six months ended June 30, 2003
and 2002, and its cash flows for the six months ended June 30, 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 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:
June 30, December 31,
2003 2002
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Acquired Mortgages:
Number of:
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates (1) through (5) 12 17
Amortized Cost $ 29,189,951 $ 32,449,759
Face Value 29,388,272 33,076,449
Fair Value 30,063,214 33,849,089
Originated Mortgages:
Number of:
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $ 15,890,725 $ 15,974,329
Face Value 15,890,724 15,974,328
Fair Value 15,960,354 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 six months ended June 30, 2003.
A distribution of approximately $0.075 per Unit related to the prepayment
of this mortgage was declared in April and paid to Unitholders in August
2003.
9
(2) In May 2003, the mortgage on Willow Dayton was prepaid. The Partnership
received net proceeds of approximately $929,000 and recognized a gain of
approximately $107,000 during the six months ended June 30, 2003. A
distribution of approximately $0.07 per Unit related to the prepayment of
this mortgage was declared in June and paid to Unitholders in August 2003.
(3) In May 2003, the mortgage on Magnolia Place Apartments was prepaid. The
Partnership received net proceeds of approximately $295,000 and recognized
a gain of approximately $29,000 during the six months ended June 30, 2003.
A distribution of approximately $0.02 per Unit related to the prepayment of
this mortgage was declared in June and paid to Unitholders in August 2003.
(4) In May 2003, HUD issued assignment proceeds in the form of a 6.375%
debenture in exchange for the mortgage on The Executive House. Since the
mortgage on The Executive House was beneficially owned 70.39% by the
Partnership and the remainder by unrelated third parties, the debenture is
held by an unrelated third party and the face amount due to the Partnership
is included in Receivables and other assets on the Partnership's balance
sheet. See further discussion in Note 5.
(5) In June 2003, the mortgage on Ashley Oaks Apartments was prepaid. The
Partnership received net proceeds of approximately $525,000 and recognized
a gain of approximately $60,000 during the six months ended June 30, 2003.
A distribution of approximately $0.04 per Unit related to the prepayment of
this mortgage was declared in July and is expected to be paid to
Unitholders in November 2003.
As of August 1, 2003, all of the GNMA Mortgage-Backed Securities and
FHA-Insured Certificates are current with respect to the payment of principal
and interest.
4. INVESTMENT IN FHA-INSURED LOANS
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
June 30, December 31,
2003 2002
------------ ------------
Acquired Loans:
Number of Loans (1)(2)(3) 4 6
Amortized Cost $ 4,986,775 $ 7,176,274
Face Value 5,918,742 8,519,762
Fair Value 5,929,879 8,513,052
Originated Loans:
Number of Loans 2 2
Amortized Cost $ 9,252,864 $ 9,311,907
Face Value 9,006,143 9,059,734
Fair Value 9,356,908 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 June 30, 2003. In addition,
approximately $150,000 is due from HUD related to the mortgage on Westbrook
Apartments, which is due to AIM 84. The Partnership recognized a gain of
approximately $228,000 during the six months ended June 30, 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, with a face value of approximately $1.8
million, in exchange for the mortgage on Baypoint Shoreline Apartments.
Since the mortgage on Baypoint Shoreline Apartments was beneficially 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.
10
(3) In July 2003, HUD transferred assignment proceeds to the Partnership in the
form of a 5.75% debenture, with a face value of approximately $2.6 million,
in exchange for the mortgage on College Green Apartments. Since the
mortgage on College Green Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 84, approximately $1.3 million of the debenture
face is due to AIM 84. See further discussion in Note 5.
As of August 1, 2003, all of the Partnership's FHA-Insured Loans were
current with respect to the payment of principal and interest.
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 and six months ended June 30, 2003, the Partnership did not
receive additional interest from the Participations. During the three and six
months ended June 30, 2002, the Partnership received additional interest of
$5,168 and $8,396, respectively, from the Participations. These amounts, if any,
are included in mortgage investment income on the accompanying Statements of
Income and Comprehensive Income.
The Section 221 Program
-----------------------
As of August 1, 2003, there are three remaining Insured Mortgages held by
the Partnership, as discussed below, 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. In some cases, the Partnership is not the
named mortgagee for the FHA-Insured Certificate. In this case, the HUD debenture
is 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
11
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, 2003 was
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 mortgages on Brougham Estates, Town Park Apartments and Kaynorth
Apartments were put to HUD under the Section 221 Program by the respective
servicers in February, March and April 2003, respectively. The aggregate face
value of these mortgages was approximately $4.7 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 August 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 June 30, 2003.
5. INVESTMENTS IN DEBENTURES 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 beneficially owned 50% by the Partnership and
50% by AIM 84, approximately $906,000 of the debenture face is due to AIM 84.
The Partnership recognized a gain of approximately $131,000 during the six
months ended June 30, 2003. The fair value of this debenture and the portion due
to AIM 84 are included in Investment in debenture and Due to affiliate,
respectively, on the Partnership's balance sheet as of June 30, 2003.
In May 2003, HUD issued assignment proceeds in the form of a 6.375%
debenture in exchange for the mortgage on The Executive House. The mortgage on
The Executive House was put to HUD under the Section 221 Program by the servicer
in April 2002. The debenture, with a face value due to the Partnership of
approximately $811,000, pays interest semi-annually on January 1 and July 1 with
a maturity date of April 3, 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. The Partnership recognized a gain of
approximately $97,000 during the six months ended June 30, 2003. Since the
Partnership only owned 70.39% of the FHA insured certificate secured by the
mortgage on The Executive House and the remainder was held by unrelated third
parties, the debenture is held by an unrelated third party and the face amount
of approximately $811,000 due to the Partnership is included in Receivables and
other assets on the Partnership's balance sheet as of June 30, 2003.
12
In July 2003, HUD transferred assignment proceeds to the Partnership in the
form of a 5.75% debenture, with a face value of approximately $2.6 million, in
exchange for the mortgage on College Green Apartments. The servicer of this
mortgage filed an application for insurance benefits under the Section 221
Program in February 2003. The debenture pays interest semi-annually on January 1
and July 1 with a maturity date of February 25, 2013. 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
College Green Apartments was beneficially owned 50% by the Partnership and 50%
by AIM 84, approximately $1.3 million of the debenture face is due to AIM 84.
The Partnership expects to recognize a gain of approximately $192,000 during the
third quarter 2003. The amortized cost of the Partnership's portion of the
mortgage on College Green Apartments is included in Investment in FHA-Insured
Loans on the Partnership's balance sheet as of June 30, 2003.
In addition, as discussed in Note 4, approximately $300,000 is due from HUD
related to the mortgage on Westbrook Apartments and amount is included in
Receivables and other assets on the Partnership's balance sheet as of June 30,
2003. Approximately $150,000 of this amount is due to AIM 84 and is included in
Due to affiliate on the Partnership's balance sheet as of June 30, 2003.
Redemption of debenture
-----------------------
In January 2003, HUD redeemed the 7.5% debenture with a face amount of
approximately $758,000, issued in July 2002 in exchange 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. This amount was included in Receivables and
other Assets on the Partnership's balance sheet at December 31, 2002.
13
6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the six months ended June 30, 2003 and 2002 are as follows:
2003 2002
------ ------
Quarter ended March 31 $0.310(1) $1.325(3)
Quarter ended June 30 0.255(2) 0.210(4)
------ ------
$0.565 $1.535
====== ======
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 June 30, 2003:
Stonebridge Apartments Mar 2003 Prepayment 0.075
Magnolia Place Apartments May 2003 Prepayment 0.020
Willow Dayton May 2003 Prepayment 0.070
(3) 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
(4) Quarter ended June 30, 2002:
Garden Court Apartments Apr 2002 Prepayment 0.090
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.
Upon the termination and liquidation of the Partnership, on or before December
31, 2009, distributions to Unitholders will be made in accordance with the terms
of the Partnership Agreement, as amended, which is not based on GAAP. As a
result, it is likely that the amounts that Unitholders receive upon termination
and liquidation of the Partnership will be substatially lower than the amounts
reflected in the Partnership's financial statements.
14
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 For the
three months ended six months ended
June 30, June 30,
Name of Recipient Capacity in Which Served/Item 2003 2002 2003 2002
----------------- ----------------------------- ---- ---- ---- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 125,006 $ 102,946 $ 276,974 $ 752,487
AIM Acquisition Partners, L.P.(2) Advisor/Asset Management Fee 157,123 191,725 320,574 381,506
CRIIMI MAE Management, Inc.(3) Affiliate of General Partner/
Expense Reimbursement 12,735 14,592 30,970 29,934
(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 $46,305 and
$94,477 for the three and six months ended June 30, 2003,
respectively, and $56,503 and $112,448 for the three and six months
ended June 30, 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.
15
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 June 30, 2003, the Partnership had invested in 22 Insured Mortgages
and two debentures with an aggregate amortized cost of approximately $61.0
million, an aggregate face value of approximately $61.9 million and an aggregate
fair value of approximately $63.0 million. As of June 30, 2003, four of these
mortgages were in the Section 221 HUD assignment process, one of which was
approved for assignment in July 2003, as discussed below. During the second
quarter of 2003, one mortgage was approved for assignment to HUD and three
mortgages prepaid as discussed in "Results of Operations."
In July 2003, HUD transferred assignment proceeds to the Partnership in the
form of a 5.75% debenture, with a face value of approximately $2.6 million, in
exchange for the mortgage on College Green Apartments. The servicer of this
mortgage filed an application for insurance benefits under the Section 221
Program in February 2003. The debenture pays interest semi-annually on January 1
and July 1 with a maturity date of February 25, 2013. 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
College Green Apartments was beneficially owned 50% by the Partnership and 50%
by AIM 84, approximately $1.3 million of the debenture face is due to AIM 84.
The Partnership expects to recognize a gain of approximately $192,000 during the
third quarter 2003.
As of August 1, 2003, all of the Insured Mortgages are current with respect
to the payment of principal and interest.
Results of Operations
---------------------
Net earnings decreased by approximately $39,000 for the three months ended
June 30, 2003, as compared to the corresponding period in 2002, primarily due to
a decrease in mortgage investment income, partially offset by an increase in
16
gains on mortgage dispositions. Net earnings decreased by approximately $1.1
million for the six months ended June 30, 2003, as compared to the corresponding
period in 2002, primarily due to a decrease in mortgage investment income and
gains on mortgage dispositions, as discussed below.
Mortgage investment income decreased by approximately $317,000 and $616,000
for the three and six months ended June 30, 2003, respectively, as compared to
the corresponding periods in 2002, primarily due to a reduction in the mortgage
base. The mortgage base decreased as a result of 12 mortgage dispositions with
an aggregate principal balance of approximately $16.2 million, representing an
approximate 21% decrease in the aggregate principal balance of the total
mortgage portfolio since June 2002.
Interest and other income decreased by approximately $48,000 and $130,000
for the three and six months ended June 30, 2003, respectively, as compared to
the corresponding periods 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 $35,000 and $61,000 for
the three and six months ended June 30, 2003, respectively, as compared to the
corresponding periods in 2002, primarily due to the reduction in the mortgage
base, as previously discussed.
General and administrative expenses decreased by approximately $7,000 for
the three months ended June 30, 2003, as compared to the corresponding period in
2002, primarily due to a decrease in professional fees. General and
administrative expenses during the six months ended June 30, 2003 were fairly
consistent with 2002.
Gains on mortgage dispositions increased by approximately $284,000 for the
three months ended June 30, 2003, and decreased by approximately $432,000 for
the six months ended June 30, 2003, as compared to the corresponding periods in
2002. During the three months ended June 30, 2003, the Partnership recognized
gains of approximately $196,000 from the prepayment of three mortgages and a
gain of approximately $97,000 from the assignment of one mortgage. During the
first quarter of 2003, the Partnership recognized a gain of approximately
$93,000 from the prepayment of one mortgage and gains of approximately $359,000
from the assignment of two mortgages. During the three months ended June 30,
2002, the Partnership recognized a gain of approximately $9,000 from the
prepayment of one mortgage. During the first quarter of 2002, the Partnership
recognized a gain of approximately $672,000 from the prepayment of one mortgage
and gains of approximately $497,000 from the assignment of three mortgages.
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 June 30, 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. Upon the termination and
liquidation of the Partnership, on or before December 31, 2009, distributions to
Unitholders will be made in accordance with the terms of the Partnership
Agreement, as amended, which is not based on GAAP. As a result, it is likely
that the amounts that Unitholders receive upon termination and liquidation of
the Partnership will be substantially lower than the amounts reflected in the
Partnership's financial statements.
17
Net cash provided by operating activities decreased by approximately $1.3
million for the six months ended June 30, 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.
Net cash provided by investing activities decreased by approximately $8.0
million for the six months ended June 30, 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 decreased by approximately $4.5
million for the six months ended June 30, 2003, as compared to the corresponding
period in 2002, due to a decrease in the amount of distributions paid to
partners in the first six 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
June 30, 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.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Purpose
31.1 Certification pursuant to the Exchange Act Rule
13a-14(a) from Barry S. Blattman, Chairman of the
Board, Chief Executive Officer and President of the
General Partner (Filed herewith).
31.2 Certification pursuant to the Exchange Act Rule
13a-14(a) from Cynthia O. Azzara, Senior Vice
President, Chief Financial Officer and Treasurer of the
General Partner (Filed herewith).
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
----
April 23, 2003 To report a press release issued on April 21, 2003
announcing the April distribution to the Partnership's
Unitholders.
May 8, 2003 To report a press release issued on May 6, 2003
announcing the Partnership's first quarter financial
results.
May 21, 2003 To report a press release issued on May 20, 2003
announcing the May distribution to the Partnership's
Unitholders.
June 20, 2003 To report a press release issued on June 20, 2003
announcing the June distribution to the Partnership's
Unitholders.
19
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
August 13, 2003 /s/ Cynthia O. Azzara
--------------- ----------------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Chief Financial Officer and
Treasurer (Principal Accounting Officer)