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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
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Commission file number 1-11060
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AMERICAN INSURED MORTGAGE INVESTORS
--------------------------------------------------
(Exact name of registrant as specified in charter)
California 13-3180848
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
----------------------------------------------------
(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 [ ]
As of September 30, 2002, 10,000,125 depository units of limited
partnership interest were outstanding.
2
AMERICAN INSURED MORTGAGE INVESTORS
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
PAGE
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 2002 (unaudited) and December 31, 2001 3
Statements of Income and Comprehensive Income - for the three
and nine months ended September 30, 2002 and 2001 (unaudited) 4
Statement of Changes in Partners' Equity - for the nine months ended
September 30, 2002 (unaudited) 5
Statements of Cash Flows - for the nine months ended September 30, 2002
and 2001 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. Other Information
Item 5. Other Information 17
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
BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount:
Originated insured mortgage $ - $ 4,806,675
Acquired insured mortgages 7,537,186 7,621,126
------------ ------------
7,537,186 12,427,801
Investment in FHA-Insured Certificates,
at fair value 9,893,892 9,727,346
Cash and cash equivalents 5,082,424 534,890
Receivables and other assets 410,795 212,451
Due from affiliate - 1,235,104
------------ ------------
Total assets $ 22,924,297 $ 24,137,592
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 4,840,431 $ 514,940
Accounts payable and accrued expenses 62,393 92,319
------------ ------------
Total liabilities 4,902,824 607,259
------------ ------------
Partners' equity:
Limited partners' equity, 10,000,125 Units authorized,
issued and outstanding 21,912,493 27,515,891
General partner's deficit (5,464,390) (5,297,038)
Accumulated other comprehensive income 1,573,370 1,311,480
------------ ------------
Total partners' equity 18,021,473 23,530,333
------------ ------------
Total liabilities and partners' equity $ 22,924,297 $ 24,137,592
============ ============
The accompanying notes are an integral part
of these financial statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income:
Mortgage investment income $ 410,377 $ 527,386 $ 1,421,441 $ 1,602,435
Interest and other income 22,702 26,805 29,285 78,913
------------ ------------ ------------ ------------
433,079 554,191 1,450,726 1,681,348
------------ ------------ ------------ ------------
Expenses:
Asset management fee to related parties 45,736 56,706 153,904 170,118
General and administrative 54,277 50,516 159,935 169,008
------------ ------------ ------------ ------------
100,013 107,222 313,839 339,126
------------ ------------ ------------ ------------
Net earnings before gain on mortgage disposition 333,066 446,969 1,136,887 1,342,222
Gain on mortgage disposition 95,540 190,207 95,540 190,207
------------ ------------ ------------ ------------
Net earnings $ 428,606 $ 637,176 $ 1,232,427 $ 1,532,429
============ ============ ============ ============
Other comprehensive (loss) income - adjustment to unrealized
gains on investments in insured mortgages (51,512) 118,685 261,890 (9,939)
------------ ------------ ------------ ------------
Comprehensive income $ 377,094 $ 755,861 $ 1,494,317 $ 1,522,490
============ ============ ============ ============
Net earnings allocated to:
Limited partners - 97.1% $ 416,176 $ 618,698 $ 1,196,687 $ 1,487,989
General Partner - 2.9% 12,430 18,478 35,740 44,440
------------ ------------ ------------ ------------
$ 428,606 $ 637,176 $ 1,232,427 $ 1,532,429
============ ============ ============ ============
Net earnings per Unit of limited
partnership interest - basic $ 0.04 $ 0.06 $ 0.12 $ 0.15
============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS
STATEMENT OF CHANGES IN PARTNERS' EQUITY
For the nine months ended September 30, 2002
(Unaudited)
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
-------------- -------------- ------------- --------------
Balance, December 31, 2001 $ (5,297,038) $ 27,515,891 $ 1,311,480 $ 23,530,333
Net earnings 35,740 1,196,687 - 1,232,427
Adjustment to unrealized gains on
investments in insured mortgages - - 261,890 261,890
Distributions paid or accrued of $0.68 per Unit,
including return of capital of $0.56 per Unit (203,092) (6,800,085) - (7,003,177)
------------ ------------ ----------- ------------
Balance, September 30, 2002 $ (5,464,390) $ 21,912,493 $ 1,573,370 $ 18,021,473
============ ============ =========== ============
Limited Partnership Units outstanding - basic, as
of September 30, 2002 10,000,125
==========
The accompanying notes are an integral part
of these financial statements.
6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN INSURED MORTGAGE INVESTORS
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net earnings $ 1,232,427 $ 1,532,429
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net gain on mortgage disposition (95,540) (190,207)
Changes in assets and liabilities:
(Increase ) decrease in due from affiliate, receivables and other assets (155,857) 33,176
(Decrease) increase in accounts payable and accrued expenses (29,926) 9,900
------------ ------------
Net cash provided by operating activities 951,104 1,385,298
------------ ------------
Cash flows provided by investing activities:
Proceeds from disposition of mortgage 4,872,570 1,184,199
Debenture proceeds received from affiliate 1,192,617 -
Receipt of mortgage principal from scheduled payments 208,929 221,354
------------ ------------
Net cash provided by investing activities 6,274,116 1,405,553
------------ ------------
Cash flows used in financing activities:
Distributions paid to partners (2,677,686) (1,544,820)
------------ ------------
Net increase in cash and cash equivalents 4,547,534 1,246,031
Cash and cash equivalents, beginning of period 534,890 567,491
------------ ------------
Cash and cash equivalents, end of period $ 5,082,424 $ 1,813,522
============ ============
The accompanying notes are an integral part
of these financial statements.
7
AMERICAN INSURED MORTGAGE INVESTORS
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
American Insured Mortgage Investors (the "Partnership") was formed under
the Uniform Limited Partnership Act of the state of California on July 12, 1983.
The Partnership Agreement ("Partnership Agreement") provides that the
Partnership will terminate on December 31, 2008, unless terminated earlier as
discussed below.
CRIIMI, Inc. (the "General Partner"), a wholly owned subsidiary of CRIIMI
MAE Inc. ("CRIIMI MAE"), holds a partnership interest of 2.9%. AIM Acquisition
Partners L.P. (the "Advisor") serves as the advisor to the Partnership pursuant
to certain advisory agreements (collectively, the "Advisory Agreements") between
the Advisor and the Partnership. The general partner of the Advisor is AIM
Acquisition Corporation 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., an affiliate of CRIIMI MAE. AIM
Acquisition is a Delaware corporation that is primarily owned by Sun America
Investments, Inc. and The Goldman Sachs Group, L.P.
Under the Advisory Agreements, the Advisor renders services to the
Partnership, including but not limited to, the management and disposition of the
Partnership's portfolio of 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. The Advisor is permitted to delegate the performance of services
pursuant to a submanagement agreement (the "Sub-Advisory Agreement"). The
delegation of such services does not relieve the Advisor of its obligation to
perform such services. CRIIMI MAE Services Limited Partnership ("CMSLP"), an
affiliate of CRIIMI MAE, manages the Partnership's portfolio, pursuant to the
Sub-Advisory Agreement. The general partner of CMSLP is CMSLP Management
Company, Inc., a wholly owned subsidiary of CRIIMI MAE.
The Partnership's investment in mortgages consists of participation
certificates evidencing a 100% undivided beneficial interest in government
insured multifamily mortgages issued or sold pursuant to Federal Housing
Administration ("FHA") programs ("FHA-Insured Certificates") and FHA-insured
mortgage loans ("FHA-Insured Loans", and together with FHA-Insured Certificates
referred to herein as "Insured Mortgages"). The mortgages underlying the
FHA-Insured Certificates and FHA-Insured Loans are non-recourse first liens on
multifamily residential developments.
As of November 1, 2002, all of the Insured Mortgages held by the
Partnership were issued under the Section 221(d)4 program of the National
Housing Act of 1937, as amended (the "Section 221 Program"). Under 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, HUD 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 HUD 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 a third party that is the named
mortgagee. An affiliate of the Partnership, American Insured Mortgage Investors
- - Series 85, L.P. ("AIM 85") is the named mortgagee for the Partnership's
FHA-Insured Certificates. AIM 85 is responsible for transferring to the
8
Partnership the related HUD insurance claim proceeds. The debenture interest is
expected be paid to the Partnership in the month it is received by AIM 85. The
debenture proceeds are expected to be paid to the Partnership in the month the
debenture is redeemed by HUD or sold by AIM 85.
Once the servicer of a mortgage has filed an application for insurance
benefits ("HUD put date") under the Section 221 program, the Partnership will no
longer receive the monthly principal and interest on the applicable mortgage,
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 July 1 through December 31, 2002 is 6.625%. 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.
Pursuant to the terms of the Partnership Agreement, the Partnership must
terminate and dissolve after disposition of all Insured Mortgages and HUD
debentures held in its portfolio, but no later than December 31, 2008. In June
2002, three of the Insured Mortgages held by the Partnership were put to HUD by
the respective servicers, as discussed below. The Partnership expects to dispose
of any remaining mortgages and HUD debentures prior to the December 31, 2008
partnership termination date. Early prepayment by HUD of all HUD debentures held
by the Partnership may effect an early termination and dissolution of the
Partnership before the stated termination date of December 31, 2008. As a
result, Unitholders' yield to maturity on their respective investments in the
Partnership may be adversely affected by such early termination of the
Partnership.
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 September 30,
2002 and December 31, 2001, the results of its operations for the three and nine
months ended September 30, 2002 and 2001 and its cash flows for the nine months
ended September 30, 2002 and 2001.
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, 2001.
9
3. INVESTMENT IN FHA-INSURED LOANS
Listed below is the Partnership's aggregate investment in FHA-Insured Loans
as of September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
------------- -------------
Number of
Acquired Insured Mortgages 3 3
Originated Insured Mortgages (1) - 1
Amortized Cost $ 7,537,186 $ 12,427,801
Face Value 9,462,197 14,428,107
Fair Value 9,391,777 13,846,281
(1) In July 2002, the mortgage on Creekside Village was prepaid. The
Partnership received net proceeds of approximately $4.9 million and
recognized a gain of approximately $96,000 for the nine months ended
September 30, 2002. A distribution of approximately $0.47 per Unit related
to the prepayment of this mortgage was declared in September and paid to
Unitholders in November 2002.
As of November 1, 2002, all of the FHA-Insured Loans are current with
respect to payment of principal and interest. The mortgages on Eastdale
Apartments and North River Place were put to HUD under the Section 221 Program
by the respective servicers in June 2002. The aggregate face value of these
mortgages was approximately $8.9 million as of the HUD put date. 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 will earn semi-annual interest on debentures issued
by HUD, as discussed above. The Partnership has not received approval for these
assignments as of November 1, 2002, and will continue to accrue interest on the
mortgages until the HUD debentures are transferred to the mortgagee and the
Partnership begins receiving the HUD debenture interest.
4. INVESTMENT IN FHA-INSURED CERTIFICATES
Listed below is the Partnership's aggregate investment in FHA-Insured
Certificates as of September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
------------- -------------
Number of mortgages 6 6
Amortized Cost $ 8,320,522 $ 8,415,866
Face Value 9,879,206 10,037,064
Fair Value 9,893,892 9,727,346
All of the FHA-Insured Certificates are current with respect to the payment
of principal and interest as of November 1, 2002, except for the mortgage on
Westbrook Apartments, which is delinquent with respect to the September and
October 2002 payments of principal and interest. The General Partner has
instructed the servicer of this mortgage to file an Election to Assign the
mortgage with HUD if the mortgage is not brought current by mid November 2002.
The face value of this mortgage was approximately $1.7 million as of the last
payment date in August 2002. If assigned, the Partnership expects to receive 99%
of this amount plus accrued interest at the debenture interest rate in effect at
the time the mortgage was originally insured and/or endorsed by HUD, whichever
is higher.
10
The mortgage on Baypoint Shoreline Apartments was put to HUD under the
Section 221 Program by the servicer in June 2002. The face value of this
mortgage was approximately $902,000 as of the HUD put date. 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 will earn semi-annual interest on debentures issued
by HUD, as discussed above. The Partnership has not received approval for this
assignment as of November 1, 2002, and will continue to accrue interest on the
mortgage until the HUD debenture is transferred to the mortgagee and the
Partnership begins receiving the HUD debenture interest.
5. DUE FROM AFFILIATE
The mortgage on Fox Run Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 85. A HUD debenture, with a face value of
approximately $2.4 million, was issued by HUD to AIM 85 in December 2000 with
interest payable semi-annually on January 1 and July 1. In January 2002, the HUD
debenture was liquidated at par value. The Partnership received approximately
$1.2 million for its share of the debenture proceeds, including interest of
approximately $42,000. A distribution of approximately $0.11 per Unit related to
the receipt of these proceeds was declared in March 2002 and paid to Unitholders
in May 2002.
6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the nine months ended September 30, 2002 and 2001 are as follows:
Quarter Ended 2002 2001
------------- ------ ------
March 31 $ 0.16 (1) $ 0.05
June 30 0.05 0.05
September 30 0.47 (2) 0.17(3)
------ ------
$ 0.68 $ 0.27
====== ======
(1) This amount includes approximately $0.11 per Unit due to the redemption of
the HUD debenture received from the assignment to HUD of the Fox Run
Apartments mortgage. This amount was received from AIM 85. The debenture
was issued to AIM 85 as the record owner of the Fox Run Apartments
mortgage. The Partnership was a 50% beneficial owner of the Fox Run
Apartments mortgage.
(2) This amount includes approximately $0.47 per unit representing net proceeds
from the prepayment of the mortgage on Creekside Village Apartments.
(3) This amount includes approximately $0.12 per unit representing net proceeds
from the prepayment of the mortgage on Berryhill Apartments.
The Partnership's remaining Insured Mortgages may be put to HUD by October
2003, if not otherwise disposed, as previously discussed. As these mortgages are
put to HUD, the Partnership's net cash flows could be significantly reduced for
several months. As a result, net cash flow distributions for the remainder of
2002 are being temporarily retained to fund the Partnership's operating expenses
during the period of reduced cash flows. Quarterly net cash flow distributions
are expected to resume no earlier than the first quarter of 2003 and may occur
later. Proceeds from mortgage dispositions and debenture redemptions, if any,
are expected to be distributed to investors as usual in the quarter in which
such proceeds are received.
In addition to the impact on cash flow distributions as a result of certain
mortgages being put to HUD, as discussed above, the cash distributions paid to
the Unitholders will vary during each period due to (1) the fluctuating yields
in the short-term money market in which the monthly mortgage payment receipts
11
are temporarily invested prior to the payment of quarterly distributions, (2)
the reduction in the asset base resulting from monthly mortgage payments
received or mortgage dispositions, (3) variations in the cash flow attributable
to the delinquency or default of Insured Mortgages, the timing of receipt of HUD
debentures, the interest rate on HUD debentures and debenture redemptions, and
(4) changes 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.
7. TRANSACTIONS WITH RELATED PARTIES
The General Partner and certain affiliated entities have earned or received
compensation for services or received distributions from the Partnership during
the three and nine months ended September 30, 2002 and 2001 as follows:
For the three months For the nine months
Capacity in Which ended September 30, ended September 30,
Name of Recipient Served/Item 2002 2001 2002 2001
- ----------------- ------------------------------------- ---------- ---------- ---------- ----------
CRIIMI, Inc. (1) General Partner/Distribution $ 140,372 $ 50,773 $ 203,092 $ 80,641
AIM Acquisition
Partners, L.P. (2) Advisor/Asset Management Fee 45,736 56,706 153,904 170,118
CRIIMI MAE Management, Affiliate of General Partner/ 12,620 7,017 35,886 29,682
Inc. Expense Reimbursement
(1) The General Partner, pursuant to the Partnership Agreement, is entitled to
receive 2.9% 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 is entitled to a fee equal to 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 $13,479 and $45,357 for
the three and nine months ended September 30, 2002, respectively, and
$16,713 and $50,139, for the three and nine months ended September 30,
2001, respectively. The general partner and limited partner of CMSLP are
wholly owned subsidiaries of CRIIMI MAE.
12
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 "believes," "anticipates," "expects," "contemplates," 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 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) the timing of the receipt
of debentures from the United States Department of Housing and Urban Development
("HUD") issued in exchange for mortgages put to HUD, (ii) the interest rate on
HUD debentures, (iii) the timing of redemption of HUD debentures, (iv) the
timing of mortgage prepayments, if any, (v) the reinvestment rate earned on
mortgage disposition proceeds and regular cash flow distributions, (vi)
regulatory and litigation matters, (vii) trends in the economy, and (viii)
defaulted mortgages. 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.
General
- -------
As of September 30, 2002, the Partnership had invested in 9 Insured
Mortgages, with an aggregate amortized cost of approximately $15.9 million, face
value of approximately $19.3 million and fair value of approximately $19.3
million.
As of November 1, 2002, all of the FHA-Insured Loans and FHA-Insured
Certificates are current with respect to payment of principal and interest,
except for the mortgage on Westbrook Apartments, which is delinquent with
respect to the September and October 2002 payments of principal and interest.
The General Partner has instructed the servicer of this mortgage to file an
Election to Assign the mortgage with HUD if the mortgage is not brought current
by mid November 2002. The face value of this mortgage was approximately $1.7
million as of the last payment date in August 2002. If assigned, the Partnership
expects to receive 99% of this amount plus accrued interest at the debenture
interest rate in effect at the time the mortgage was originally insured and/or
endorsed by HUD, whichever is higher.
The mortgages on Eastdale Apartments, North River Place and Baypoint
Shoreline Apartments were put to HUD under the Section 221 Program, as discussed
below, by the respective servicers in June 2002. The aggregate face value of
these mortgages was approximately $9.8 million as of the HUD put date. 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 will earn semi-annual interest on
debentures issued by HUD, as discussed below. The Partnership has not received
approval for these assignments as of November 1, 2002, and will continue to
accrue interest on the mortgages until the HUD debentures are transferred to the
mortgagee and the Partnership begins receiving the HUD debenture interest.
13
As of November 1, 2002, all of the Insured Mortgages held by the
Partnership were issued under the Section 221(d)4 program of the National
Housing Act of 1937, as amended (the "Section 221 Program"). Under the Section
221 Program, a mortgagee has the right to assign a mortgage ("put") to 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, HUD 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 HUD 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 a third
party that is the named mortgagee. An affiliate of the Partnership, American
Insured Mortgage Investors - Series 85, L.P. ("AIM 85") is the named mortgagee
for the Partnership's FHA-Insured Certificates. AIM 85 is responsible for
transferring to the Partnership the related HUD insurance claim proceeds. The
debenture interest is expected be paid to the Partnership in the month it is
received by AIM 85. The debenture proceeds are expected to be paid to the
Partnership in the month the debenture is redeemed by HUD or sold by AIM 85.
Once the servicer of a mortgage has filed an application for insurance
benefits ("HUD put date") under the Section 221 program, the Partnership will no
longer receive the monthly principal and interest on the applicable mortgage,
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 July 1 through December 31, 2002 is 6.625%. 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.
Pursuant to the terms of the Partnership Agreement, the Partnership must
terminate and dissolve after disposition of all Insured Mortgages and HUD
debentures held in its portfolio, but no later than December 31, 2008. In June
2002, three of the Insured Mortgages held by the Partnership were put to HUD by
the respective servicers, as discussed above. The Partnership expects to dispose
of any remaining mortgages and HUD debentures prior to the December 31, 2008
partnership termination date. Early prepayment by HUD of all HUD debentures held
by the Partnership may effect an early termination and dissolution of the
Partnership before the stated termination date of December 31, 2008. As a
result, Unitholders' yield to maturity on their respective investments in the
Partnership may be adversely affected by such early termination of the
Partnership.
14
Results of Operations
- ---------------------
Net earnings decreased by approximately $209,000 and $300,000 for the three
and nine months ended September 30, 2002, respectively, as compared to the
corresponding periods in 2001, primarily due to reductions in mortgage
investment income, interest and other income and gain on mortgage disposition,
as discussed below. This decrease in income is partially offset by a decrease in
the asset management fee to related parties.
Mortgage investment income decreased by approximately $117,000 and $181,000
for the three and nine months ended September 30, 2002, respectively, as
compared to the corresponding periods in 2001, primarily due a reduction in the
Partnership's mortgage base. The Partnership's mortgage base decreased due to
two mortgage dispositions with a principal balance of approximately $6.0
million, representing an approximate 23% decrease in the aggregate principal
balance of the total mortgage portfolio since September 2001. The mortgage on
Creekside Village prepaid in July 2002, reflecting six months of mortgage
investment income for the nine months ended September 30, 2002.
Interest and other income decreased by approximately $4,000 and $50,000 for
the three and nine months ended September 30, 2002, respectively, as compared to
the corresponding periods in 2001. This decrease is primarily due to a decrease
in interest earned on the HUD debenture due from an affiliate, as discussed
below. This decrease in interest and other income is partially offset by an
increase in interest earned on the temporary investment of mortgage disposition
proceeds prior to distribution.
The asset management fee to related parties decreased by approximately
$11,000 and $16,000 for the three and nine months ended September 30, 2002,
respectively, as compared to the corresponding periods in 2001, primarily due to
the 23% reduction in the Partnership's mortgage base, as previously discussed.
General and administrative expenses increased by approximately $4,000 for
the three months ended September 30, 2002 and decreased by approximately $9,000
for the nine months ended September 30, 2002, as compared to the corresponding
periods in 2001. The increase for the three month period is primarily due to an
increase in expenses related to the termination of the Dividend Reinvestment
Plan (DRP), mortgage assignments and the decision to defer regular cash flow
distributions. The decrease for the nine month period is primarily due to a
decrease in overhead costs directly related to the size of the mortgage base.
This decrease was partially offset by an increase in expenses related to the
termination of the DRP, mortgage assignments and the decision to defer regular
cash flow distributions. In addition, for the nine month period, costs
associated with partner level tax reporting increased as a result of the new
Internal Revenue Service electronic filing requirements for large partnerships.
The gain on mortgage disposition decreased by approximately $95,000 for the
three and nine months ended September 30, 2002, as compared to the corresponding
periods in 2001. During the three and nine months ended September 30, 2002, the
Partnership recognized a gain of approximately $96,000 on the prepayment of the
mortgage on Creekside Village Apartments. During the three and nine months ended
September 30, 2001, the Partnership recognized a gain of approximately $190,000
on the prepayment of the mortgage on Berryhill Apartments.
Liquidity and Capital Resources
- -------------------------------
The Partnership's remaining Insured Mortgages may be put to HUD by October
2003, if not otherwise disposed, as previously discussed. As these mortgages are
put to HUD, the Partnership's net cash flows could be significantly reduced for
several months. As a result, net cash flow distributions for the remainder of
2002 are being temporarily retained to fund the Partnership's operating expenses
15
during the period of reduced cash flows. Quarterly net cash flow distributions
are expected to resume no earlier than the first quarter of 2003 and may occur
later. Proceeds from mortgage dispositions and debenture redemptions, if any,
are expected to be distributed to investors as usual in the quarter in which
such proceeds are received.
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, plus cash receipts from interest on
short-term investments, were sufficient for the nine months ended September 30,
2002 to meet operating requirements. In addition to the impact on cash flow
distributions as a result of certain mortgages being put to HUD, as discussed
above, the cash distributions paid to the Unitholders will vary during each
period due to (1) the fluctuating yields in the short-term money market in which
the monthly mortgage payment receipts are temporarily invested prior to the
payment of quarterly distributions, (2) the reduction in the asset base
resulting from monthly mortgage payments received or mortgage dispositions, (3)
variations in the cash flow attributable to the delinquency or default of
Insured Mortgages, the timing of receipt of HUD debentures, the interest rate on
HUD debentures and debenture redemptions, and (4) changes 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
$434,000 for the nine months ended September 30, 2002, as compared to the
corresponding period in 2001, primarily due to lower mortgage investment income
resulting from a reduction in the mortgage base and an increase in receivables
and other assets. The increase in receivables and other assets is due to an
increase in principal and interest accrued for the mortgages awaiting assignment
from HUD under the Section 221 Program, as previously discussed.
Net cash provided by investing activities increased by approximately $4.9
million for the nine months ended September 30, 2002, as compared to the
corresponding period in 2001, primarily due to an increase in proceeds received
from the prepayment of mortgages and the receipt of debenture proceeds from AIM
85 in 2002, as discussed below.
The mortgage on Fox Run Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 85. A HUD debenture, with a face value of
approximately $2.4 million, was issued to AIM 85 in December 2000 with interest
payable semi-annually on January 1 and July 1. In January 2002, the HUD
debenture was liquidated at par value. The Partnership received approximately
$1.2 million for its share of the debenture proceeds, including interest of
approximately $42,000. A distribution of approximately $0.11 per Unit related to
the receipt of these proceeds was declared in March 2002 and paid to Unitholders
in May 2002.
Net cash used in financing activities increased by approximately $1.1
million for the nine months ended September 30, 2002, as compared to the
corresponding period in 2001, due to an increase in the amount of distributions
paid to partners during the first nine months of 2002 as compared to the same
period in 2001.
16
PART I. FINANCIAL INFORMATION
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's principal market risk is exposure to changes in interest
rates in the U.S. Treasury market. The Partnership will experience fluctuations
in the market value of its assets related to (i) changes in the interest rates
of U.S. Treasury securities, (ii) changes in the spread between the interest
rates on U.S. Treasury securities and the interest rates on the Partnership's
Insured Mortgages, and (iii) changes in the weighted average life of the Insured
Mortgages, determined by reviewing the attributes of the Insured Mortgages in
relation to the current market interest rates. The weighted average life of the
Insured Mortgages decreased as of September 30, 2002 compared to December 31,
2001, due to the lower market interest rates, which may imply faster prepayment
rates, and other attributes of the Partnership's Insured Mortgages.
The General Partner has determined that there has not been a material
change as of September 30, 2002, in market risk from December 31, 2001 as
reported in the Partnership's Annual Report on Form 10-K as of December 31,
2001.
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 (CEO) and the Chief Financial Officer
(CFO), of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Securities Exchange Act Rule 13a-14 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
17
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Section 10(A)(i)(2) of the Securities Exchange Act of 1934, as amended,
requires issuers to disclose the approval by an audit committee of the issuer of
a non-audit service to be performed by the auditor of the issuer. On August 14,
2002, the Audit Committee of the Board of Directors of the General Partner's
parent, CRIIMI MAE Inc., subject to any rules that may be adopted by the Public
Accounting Oversight Board, approved the engagement of Ernst & Young LLP, the
Partnership's auditor, to provide tax services to the Partnership during the
fiscal year ending December 31, 2002.
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
99.2 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Date
----
August 8, 2002 To report the General Partner's decision
to defer the payment of regular cash
flow distributions to the Partnership's
Unitholders.
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
(Registrant)
By: CRIIMI, Inc.
General Partner
November 13, 2002 /s/ Cynthia O. Azzara
- ----------------- -------------------------------------------
Date Cynthia O. Azzara
Senior Vice President, Principal Accounting
Officer and Chief Financial Officer
19
CERTIFICATION
I, William B. Dockser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Insured
Mortgage Investors;
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 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
(Registrant)
By: CRIIMI, Inc.
General Partner
Date: November 13, 2002 /s/ William B. Dockser
----------------- -----------------------------------
William B. Dockser
Chairman of the Board and
Chief Executive Officer
20
CERTIFICATION
I, Cynthia O. Azzara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Insured
Mortgage Investors;
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 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
(Registrant)
By: CRIIMI, Inc.
General Partner
Date: November 13, 2002 /s/ Cynthia O. Azzara
----------------- -------------------------------------------
Cynthia O. Azzara
Senior Vice President, Principal Accounting
Officer and Chief Financial Officer