Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------
For the fiscal year ended December 31, 2002 Commission file number 1-11059
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
-----------------------------------------------------
(Exact name of registrant as specified in it's charter)
California 13-3257662
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and
telephone number,
including area code, of registrant's principal executive offices)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- --------------------------- ------------------------
Depositary Units of Limited American Stock Exchange
Partnership Interest
Securities registered pursuant to Section 12(g) of the Act:
None
------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of December 31, 2002, 12,079,514 depositary units of limited partnership
interest were outstanding. The aggregate market value of such units held by
non-affiliates of the Registrant, based on the last reported sale price on June
28, 2002, was $78,128,576.
Documents incorporated by Reference
None
2
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business......................................................................... 3
Item 2. Properties....................................................................... 5
Item 3. Legal Proceedings................................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.............................. 5
PART II
Item 5. Market for Registrant's Securities and Related Security Holder Matters........... 6
Item 6. Selected Financial Data.......................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 7
Item 7a. Qualitative and Quantitative Disclosures about Market Risk....................... 16
Item 8. Financial Statements and Supplementary Data...................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 18
Item 11. Executive Compensation........................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners, Management and Related
Unitholder Matters............................................................ 20
Item 13. Certain Relationships and Related Transactions................................... 21
Item 14. Controls and Procedure........................................................... 21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 22
Signatures ................................................................................. 25
Certifications ................................................................................. 26
3
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS. When used in this Annual Report on Form 10-K, 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 Annual Report on Form
10-K 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 Annual
Report on Form 10-K, including, without limitation, statements made under Item
7, 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 (defined below) 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.
Development and Description of Business
- ---------------------------------------
American Insured Mortgage Investors - Series 85, L.P. (the "Partnership")
was formed pursuant to a limited partnership agreement ("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
4
"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.
Additional information concerning the business of the Partnership is
contained in Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 1, 5, 6, 7 and 8 of the Notes
to Financial Statements (filed in response to Item 8 hereof), all of which are
incorporated by reference herein. See also Schedule IV-Mortgage Loans on Real
Estate for the table of the Partnership's Insured Mortgages as of December 31,
2002, which is incorporated by reference herein.
Employees and Management of the Partnership
- -------------------------------------------
The Partnership has no employees. The business of the Partnership is
managed by its General Partner while its portfolio of mortgages is managed by
the Advisor and CMSLP pursuant to the Advisory Agreements and Sub-Advisory
Agreement, respectively, as discussed above. A wholly-owned subsidiary of CRIIMI
MAE, CRIIMI MAE Management, Inc., provides personnel and administrative services
to the Partnership on behalf of the General Partner. The Partnership reimburses
CRIIMI MAE Management, Inc. for these services on an actual cost basis pursuant
to the terms of the Partnership Agreement.
The fee paid by the Partnership to the Advisor for services performed under
the Advisory Agreements (the "Advisory Fee"), is equal to 0.95% of the
Partnership's Total Invested Assets (as defined in the Partnership Agreement).
The Advisor pays CMSLP, as sub-advisor, a fee of 0.28% (the "Sub-Advisory Fee")
of Total Invested Assets for services performed under the Sub-Advisory Agreement
from its Advisory Fee. The Partnership is not liable for paying the Sub-Advisory
Fee to CMSLP. Additional information concerning these fees is contained in Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and in Note 8 of the Notes to Financial Statements (filed
in response to Item 8 hereof), all of which are incorporated by reference
herein.
Competition
- -----------
The Partnership's business consists of holding government insured mortgage
investments primarily on multifamily housing properties, and distributing the
payments of principal and interest on such mortgage investments, including
debentures issued by the United States Department of Housing and Urban
Development ("HUD") in exchange for such mortgages, to the holders of its
depository units of limited partnership interests ("Unitholders"). The
Partnership may elect to dispose of its mortgage investments through a sale to
third parties. In disposing of mortgage investments, the Partnership competes
5
with private investors, mortgage banking companies, mortgage brokers, state and
local government agencies, lending institutions, trust funds, pension funds, and
other entities, some with similar objectives to those of the Partnership and
some of which are or may be affiliates of the Partnership, its General Partner,
the Advisor, CMSLP or their respective affiliates. Some of these entities may
have substantially greater capital resources and experience in disposing of
mortgages investments than the Partnership.
CRIIMI MAE and its affiliates also may serve as general partners or
managers of real estate limited partnerships, real estate investment trusts or
other similar entities in the future. The Partnership may attempt to dispose of
mortgages at or about the same time that CRIIMI MAE, one or more of the other
AIM Limited Partnerships and/or other entities managed by CRIIMI MAE or its
affiliates, or the Advisor or its affiliates, are attempting to dispose of
mortgages. As a result of market conditions that could have the effect of
limiting the number of mortgage dispositions or adversely affecting the proceeds
received from such dispositions, CMSLP, the General Partner and the Advisor and
their affiliates could be faced with conflicts of interest in determining which
mortgages would be disposed of and at which price. CMSLP, the General Partner
and the Advisor, however, are required to exercise their fiduciary duties of
good faith, care and loyalty when evaluating the appropriate action to be taken
when faced with such conflicts.
ITEM 2. PROPERTIES
The Partnership does not own any properties. Generally, the mortgages
underlying the Partnership's mortgage investments are non-recourse first liens
on multifamily residential developments or retirement homes.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Partnership is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's Unitholders during
the fourth quarter of 2002.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY
HOLDER MATTERS
Principal Market and Market Price for Units and Distributions
- -------------------------------------------------------------
The depository units of Limited Partnership interests ("Limited
Partnership Units") are listed for trading on the American Stock Exchange
("AMEX") under the trading symbol of "AII." The high and low trade prices for
the Units as reported on AMEX and the distributions, as applicable, for each
quarterly period in 2002 and 2001 were as follows:
Amount of
2002 Distribution
Quarter Ended High Low Per Unit
------------- ---- --- --------
March 31 $ 8.0000 $ 6.3800 $ 1.325
June 30 6.6300 6.3000 0.210
September 30 6.6700 6.0600 0.410
December 31 6.4300 5.7700 0.810
--------
$ 2.755
========
Amount of
2001 Distribution
Quarter Ended High Low Per Unit
------------- ---- --- --------
March 31 $ 8.3125 $ 7.6500 $ 0.680
June 30 7.9000 7.5000 0.370
September 30 7.9800 7.3500 0.710
December 31 8.1000 7.5100 0.150
--------
$ 1.910
========
Detailed information regarding quarterly distributions is contained in Note
9 of the Notes to Financial Statements (filed in response to Item 8 hereof)
incorporated by reference herein.
There are no material legal restrictions upon the Partnership's present or
future ability to make distributions in accordance with the provisions of the
Partnership Agreement.
The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although the
Partnership's Insured Mortgages pay a fixed monthly mortgage 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 in which the monthly
mortgage payment receipts are temporarily invested, by the General Partner,
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 debentures, the interest rate on
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.
As of December 31, 2002, there were approximately 9,700 Unitholders.
The Partnership has no compensation plans or individual compensation
arrangements under which equity securities of the Partnership are authorized for
issuance.
7
PART II
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per Unit amounts)
For the Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income $ 6,443 $ 8,526 $ 9,979 $ 12,230 $ 14,744
Net gains on mortgage
dispositions 1,851 1,785 428 857 1,403
Net earnings 7,138 8,969 8,866 11,225 13,893
Net earnings per Limited
Partnership Unit - Basic (1) $ 0.57 $ 0.71 $ 0.71 $ 0.89 $ 1.11
Distributions per Limited
Partnership Unit (1)(2) $ 2.755 $ 1.91 $ 1.61 $ 3.09 $ 3.45
As of December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets $ 78,238 $ 98,070 $ 118,621 $ 143,470 $ 170,970
Partners' equity 67,940 94,828 110,982 120,445 153,543
(1) Calculated based upon the weighted average number of Limited Partnership
Units outstanding.
(2) Includes distributions due the Unitholders for the Partnership's fiscal
years ended December 31, 2002, 2001, 2000, 1999 and 1998, which were
partially paid subsequent to year end. See Notes 8 and 9 of the Notes to
Financial Statements.
The selected income statement data presented above for the years ended
December 31, 2002, 2001 and 2000, and the selected balance sheet data as of
December 31, 2002 and 2001, are derived from, and are qualified by, reference to
the Partnership's financial statements, which are included elsewhere in this
Annual Report on Form 10-K. The selected income statement data for the years
ended December 31, 1999 and 1998, and the selected balance sheet data as of
December 31, 2000, 1999 and 1998 are derived from audited financial statements
not included as part of this Annual Report on Form 10-K. This data should be
read in conjunction with the financial statements and the notes thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis contains statements that may be
considered forward looking. These statements contain a number of risks and
uncertainties as discussed herein and in Item 1 of this Annual Report on Form
10-K that could cause actual results to differ materially.
Mortgage Investments
- --------------------
As of December 31, 2002, the Partnership had invested in 29 Insured
Mortgages, with an aggregate amortized cost of approximately $64.9 million, a
face value of approximately $66.6 million and a fair value of approximately
$67.8 million, as discussed below.
8
Investment in Insured Mortgages
- -------------------------------
The Partnership's investment in Insured Mortgages is comprised of
participation certificates evidencing a 100% undivided beneficial interest in
government insured multifamily mortgages issued or sold pursuant to the Federal
Housing Administration ("FHA") programs ("FHA-Insured Certificates"),
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") ("GNMA Mortgage-Backed Securities") and FHA-insured
mortgage loans ("FHA-Insured Loans"). The mortgages underlying the FHA-Insured
Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are
non-recourse first liens on multifamily residential developments or retirement
homes.
The following is a discussion of the types of the Partnership's mortgage
investments, along with the risks related to each type of investment:
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:
December 31,
2002 2001
---- ----
Acquired Mortgages:
Number of
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates (1) through (6) 17 26
Amortized Cost $ 32,449,759 $ 44,640,062
Face Value 33,076,449 46,215,896
Fair Value 33,849,089 45,845,197
Originated Mortgages:
Number of
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $ 15,974,329 $ 16,132,560
Face Value 15,974,328 16,132,560
Fair Value 15,986,295 15,734,485
Listed below is a summary of prepayments during 2002 on the Insured
Mortgages:
(Dollars in thousands, except per unit amounts)
Date Distribution
Net Proceeds Gain/ Dist./ Declaration Payment
Complex Name Proceeds Received Loss Unit Date Date
------------ -------- -------- ---- ---- ---- ----
(1) Garden Court Apartments $1,152 Apr 2002 $ 9 $0.09 Apr 2002 Aug 2002
(2) Franklin Plaza 5,029 Sep 2002 (8) 0.40 Oct 2002 Feb 2003
(3) Rock Glen Apartments 1,009 Oct 2002 117 0.08 Nov 2002 Feb 2003
(4) Highland Oaks Apartments 888 Nov 2002 96 0.07 Dec 2002 Feb 2003
(5) Walnut Hills Apartments 454 Dec 2002 83 0.04 Jan 2003 May 2003
(6) Four mortgages were approved for assignment to HUD under the section 221
Program, as discussed below in "Redemption of debentures".
As of March 1, 2003, all of the fully insured GNMA Mortgage-Backed
Securities and FHA-Insured Certificates are current with respect to the payment
of principal and interest.
9
In addition to regular interest payments under Originated Insured Mortgages
FHA-Insured Certificates, 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 years ended December 31, 2002,
2001 and 2000, the Partnership received $0 from the Participations.
The Section 221 Program
-----------------------
Certain Insured Mortgages held by the Partnership are eligible for
assignment to HUD under the Section 221(g)(4) program of the National Housing
Act (the "Section 221 Program"). A mortgagee has the right to assign a mortgage
("put") to the United States Department of Housing and Urban Development ("HUD")
at the expiration of 20 years from the date of final endorsement ("Anniversary
Date") if the mortgage is not in default at such time. The mortgagee may
exercise its option to put the mortgage to HUD during the one year period
subsequent to the Anniversary Date. This assignment procedure is applicable to
an Insured Mortgage, which had a firm or conditional commitment for HUD
insurance benefits on or before November 30, 1983. Any mortgagee electing to
assign an Insured Mortgage to HUD receives, in exchange therefor, debentures
having a total face value equal to (i) the then outstanding principal balance of
the Insured Mortgage (ii) plus accrued interest on the mortgage to the date of
assignment ("Debenture Issuance Date"). These debentures generally mature 10
years from the date of assignment and bear interest at a rate announced
semi-annually by HUD in the Federal Register ("going Federal rate") at such
date. Generally, the Partnership is not the named mortgagee for the FHA-Insured
Certificates. In this case, the HUD debentures are generally issued to an
unrelated third party that is the named mortgagee. The servicer of the
applicable mortgage is responsible for delivering to the Partnership all HUD
insurance claim proceeds. The debenture interest is paid to the Partnership in
the month it is received by the servicer. The debenture proceeds are paid to the
Partnership in the month the debenture is redeemed by HUD or sold by the
servicer. Based on the recommendation of CMSLP, the sub-advisor, and the consent
of the Advisor the General Partner may elect to put Insured Mortgages to HUD,
based upon, in general, but not limited to, (i) the interest rates on mortgages,
(ii) the interest rates on debentures issued by HUD and (iii) the costs and
risks associated with continuing to hold the Insured Mortgages.
Once the servicer of an Insured Mortgage has filed an application for
insurance benefits ("HUD put date") under the Section 221 program on behalf of
the Partnership, the Partnership will no longer receive the monthly principal
and interest on the applicable mortgage, and instead, HUD will begin receiving
the monthly principal and interest. HUD issues debentures at the time the
mortgage is assigned to HUD (approximately 30 days after the HUD put date);
however, the debentures are not transferred to the mortgagee until HUD completes
its assignment process of the Insured Mortgage. Based on the General Partner's
experience, HUD's assignment process is generally six to eighteen months. After
HUD completes its assignment process for the Insured Mortgage, HUD transfers to
the mortgagee (i) HUD debentures, as discussed above, (ii) plus cash for accrued
interest on the debentures at the going Federal rate, from the Debenture
Issuance Date to the most current interest payment date. Thereafter, the
mortgagee receives interest on the debentures on the semi-annual payment dates
of January 1 and July 1. The going Federal rate for HUD debentures issued under
the Section 221 Program for the period January 1 through June 30, 2002 was
6.375%; for the period July 1 through December 31, 2002 it was 6.625%; and for
the period January 1 through June 30, 2003 it is 5.75%. The Partnership will
recognize a gain on a mortgage assignment at the time it receives notification
that the assignment has been approved. HUD assignment approval generally occurs
when HUD transfers the debentures to the mortgagee and/or when the Partnership
receives cash for the accrued interest on the debentures. The Partnership
recognizes a loss on a mortgage assignment when it becomes probable that a loss
will be incurred. The gain or loss recognized is generally equal to proceeds
received from HUD, as discussed above, less the amortized cost of the Insured
Mortgage.
a. Redemption of debentures
------------------------
The following list represents debentures issued in 2001 and redeemed in
January 2002. In addition, the Partnership received interest on these debentures
in 2002: (1) a distribution of approximately $0.02 per unit of interest related
to the debentures issued in exchange for the mortgages on Park Hill Apartments,
10
Fairfax House and Woodland Villas was declared in January 2002, and (2) a
distribution of approximately $0.02 per unit of interest related to the
debentures issued in exchange for the mortgages on Summit Square Manor, Park
Place, Park Hill Apartments, Fairfax House and Woodland Villas was declared in
February 2002. These distributions were paid in May 2002.
(Dollars in thousands, except per unit amounts)
Debenture Dist.
Interest Net HUD put Dist./ Declaration Payment
Complex Name Rate Proceeds Date Unit Date Date
- ------------ ---- -------- ---- ---- ---- ----
Summit Square Manor 7.125% $ 1,883 Jun 2000 $ 0.150 Feb 2002 May 2002
Park Place 7.125% 746 Jun 2000 0.060 Feb 2002 May 2002
Park Hill Apartments 7.500% 1,721 Sep 2000 0.140 Feb 2002 May 2002
Fairfax House 7.500% 2,109 Sep 2000 0.170 Feb 2002 May 2002
Woodland Villas 7.125% 300 Apr 2001 0.025 Feb 2002 May 2002
------- -------
$ 6,759 $ 0.545
======= =======
The following list represents debentures issued in January 2002 and
redeemed in July 2002. The aggregate gain of $497,000 was recognized in the
first quarter of 2002, when the Partnership received approximately $286,000 of
accrued interest in cash on these debentures. A distribution related to this
accrued debenture interest of approximately $0.02 per Unit was declared in March
2002 and paid in May 2002. Net proceeds represent (i) the Partnership's
beneficial interest in the face value of the debenture, plus (ii) interest
earned on the debenture during the HUD assignment process, less (iii) net
mortgage investment income due on the applicable mortgage during the HUD
assignment process.
(Dollars in thousands, except per unit amounts)
Debenture Gain Dist
Interest Net HUD put 1st Qtr. Dist./ Declaration Payment
Complex Name Rate Proceeds Date 2002 Unit Date Date
- ------------ ---- -------- ---- ----- ----- ---- ----
Country Club Terrace Apts. 7.500% $1,425 Sep 2000 $ 178 $0.12 Aug 2002 Nov 2002
Nevada Hills Apartments 7.500% 1,134 Dec 2000 154 0.09 Aug 2002 Nov 2002
Dunhaven Apartments 7.125% 872 Jan 2001 165 0.07 Aug 2002 Nov 2002
------ ----- -----
$3,431 $ 497 $0.28
====== ===== =====
Subsequent to December 31, 2002, a 7.5% debenture of approximately
$758,000, issued in July 2002 for the mortgage on Fairlawn II was redeemed by
HUD in January 2003. The Partnership recognized a gain of approximately $95,000
in the third quarter of 2002, when the Partnership received approximately
$100,000 of accrued interest in cash on this debenture. A distribution related
to this accrued debenture interest of approximately $0.01 per Unit was declared
in August 2002 and paid in November 2002. A distribution of approximately $0.06
per Unit related to the debenture proceeds was declared in February 2003 and is
expected to be 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. The 7.5%
debenture proceeds and accrued interest are included in receivables and other
assets in the Partnership's balance sheet as of December 31, 2002.
b. Mortgages in the HUD assignment process
---------------------------------------
The mortgage on Executive House was put to HUD under the Section 221
Program by its servicer in April 2002. The face value of this mortgage was
approximately $805,000 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 earns semi-annual interest on debentures issued by HUD, as discussed
above. The Partnership has not received approval for this assignment as of March
1, 2003, and will continue to accrue interest on the mortgage until the HUD
debenture is transferred to the Partnership and it begins receiving the HUD
debenture interest. The fair value of this mortgage is included in Investment in
FHA-Insured Certificates and GNMA Mortgage-Backed Securities, Acquired Insured
Mortgages in the Partnership's balance sheet as of December 31, 2002.
11
c. Remaining mortgages eligible for assignment
-------------------------------------------
The Partnership's mortgage portfolio includes minority interests in five
FHA-Insured Certificates eligible under the Section 221 Program with anniversary
dates in April 2002. Since it owns less than 34% of these FHA-Insured
Certificates and the other certificate holders have not yet elected to put these
mortgages to HUD the Partnership does not expect these mortgages to be put to
HUD. The Partnership does not own any other FHA-Insured Certificates or GNMA
Mortgage-Backed Securities eligible to be put to HUD.
FHA-Insured Loans
- -----------------
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
December 31,
2002 2001
---- ----
Acquired Loans:
Number of Loans (2)(3) 6 7
Amortized Cost $ 7,176,274 $ 8,914,573
Face Value 8,519,762 10,632,937
Fair Value 8,513,052 10,451,178
Originated Loans:
Number of Loans (1) 2 3
Amortized Cost $ 9,311,907 $ 12,430,002
Face Value 9,059,734 12,132,653
Fair Value 9,470,182 12,122,221
(1) In January 2002, the mortgage on Longleaf Lodge was prepaid. The
Partnership received net proceeds of approximately $3.7 million and
recognized a gain of approximately $672,000 during the year ended December
31, 2002. A distribution of approximately $0.29 per Unit related to the
prepayment of this mortgage was declared in January 2002 and paid to
Unitholders in May 2002.
(2) In December 2002, the mortgage on Bay Pointe Apartments was prepaid. The
Partnership received net proceeds of approximately $1.9 million and
recognized a gain of approximately $290,000 during the year ended December
31, 2002. A distribution of approximately $0.15 per Unit related to the
prepayment of this mortgage was declared in December 2002 and paid to
Unitholders in February 2003.
(3) 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 expected to be received during the next 12
months. The Partnership expects to recognize a gain of approximately
$228,000 during the first quarter of 2003. A distribution of approximately
$0.12 per Unit related to the assignment of this mortgage was declared in
February 2003 and is expected to be paid to Unitholders in May 2003.
As of March 1, 2003, all of the fully insured FHA-Insured Loans were
current with respect to the payment of principal and interest, except for the
mortgage on Town Park Apartments, which is delinquent with respect to the
February 2003 payment of principal and interest, as discussed further below.
In addition to base interest payments under Originated Insured Mortgages
FHA-Insured Loans, the Partnership is entitled to additional interest
Participations. During the years ended December 31, 2002, 2001 and 2000, the
Partnership received $8,396, $53,424, and $21,566, respectively, from the
Participations. These amounts are included in mortgage investment income on the
accompanying statements of income and comprehensive income.
The Section 221 Program
-----------------------
a. Issuance of HUD Debenture
-------------------------
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
12
Shoreline Apartments. The servicer of this mortgage filed an application for
insurance benefits under the Section 221 Program in June 2002. The mortgage on
Baypoint Shoreline Apartments was beneficially owned 50% by the Partnership and
50% by AIM 84. 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 prior to its maturity date. A distribution
will be declared at that time. Since the mortgage on Baypoint Shoreline
Apartments was owned 50% by the Partnership and 50% by AIM 84, approximately
$906,000 of the debenture face is due to AIM 84. In February 2003, the
Partnership received approximately $59,000 in cash of accrued interest on this
Debenture. Approximately $29,000 of this accrued interest was transferred to AIM
84 and the remaining amount will be distributed through regular cash flow
distributions. The Partnership expects to recognize a gain of approximately
$131,000 during the first quarter of 2003.
b. Mortgages in the HUD assignment process
---------------------------------------
The mortgages on Brougham Estates and College Green Apartments were put to
HUD under the Section 221 Program by the respective servicers in February 2003.
The aggregate face value of these mortgages was approximately $3.7 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 earns
semi-annual interest on debentures issued by HUD, as discussed above. The
Partnership has not received approval for these assignments as of March 1, 2003,
and will continue to accrue interest on the mortgages until the HUD debentures
are transferred to the Partnership and it begins receiving the HUD debenture
interest.
c. Remaining mortgages eligible for assignment
-------------------------------------------
The Partnership's mortgage portfolio includes two FHA-Insured Loans
eligible under the Section 221 Program with anniversary dates in September and
October 2002, including Kaynorth Apartments and Town Park Apartments. The
Partnership expects these mortgages to be put to HUD, if not otherwise disposed,
by the servicer during the second quarter of 2003.
Investment in debenture
- -----------------------
The mortgage on Fox Run Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 84. A 7.125% debenture, with a face value of
approximately $2.4 million, was issued by HUD to the Partnership in December
2000 with interest payable semi-annually on January 1 and July 1. In January
2002, the debenture was liquidated at par value. Since the mortgage on Fox Run
Apartments was owned 50% by the Partnership and 50% by AIM 84, approximately
$1.2 million of the debenture proceeds were paid to AIM 84, including interest
of approximately $42,000. A distribution of approximately $0.09 per Unit related
to the redemption of this debenture was declared in January 2002 and paid to
Unitholders in May 2002.
Results of Operations
- ---------------------
2002 compared to 2001
- ---------------------
Net earnings decreased by approximately $1.8 million for 2002 as compared
to 2001, primarily due an approximate $1.8 million decrease in mortgage
investment income resulting from the reduction in the mortgage base. The
mortgage base decreased as a result of 11 mortgage dispositions with an
aggregate principal balance of approximately $18 million, representing an
approximate 20% decrease in the aggregate principal balance of the total
mortgage portfolio since December 2001.
Interest and other income decreased by approximately $268,000 for 2002 as
compared to 2001, primarily due to the timing and amount of the investment of
mortgage proceeds prior to the distribution to Unitholders.
13
Asset management fees decreased by approximately $215,000 for 2002 as
compared to 2001, primarily due to the reduction in the mortgage base discussed
above.
General and administrative expenses increased by approximately $29,000 for
2002 as compared to 2001, primarily due to an increase in professional fees.
Gains on mortgage dispositions increased by approximately $74,000 for 2002
as compared to 2001 as a result of gains recognized on six mortgage prepayments
and four mortgage assignments in 2002, as discussed above, compared to gains
recognized on seven mortgage prepayments and five mortgage assignments in 2001.
A loss was recognized on one mortgage prepayment in 2002 as discussed above. No
losses were recognized in 2001.
2001 compared to 2000
- ---------------------
Net earnings increased slightly for 2001 as compared to 2000, primarily due
to an increase in net gains from mortgage dispositions, as discussed below,
partially offset by a decrease in mortgage investment income of approximately
$1.6 million, primarily due to the reduction in the mortgage base. The mortgage
base decreased as a result of 17 mortgage dispositions with an aggregate
principal balance of approximately $34 million, representing an approximate 28%
decrease in the aggregate principal balance of the total mortgage portfolio
since March 2000.
Interest and other income increased by approximately $161,000 for 2001 as
compared to 2000, primarily due to the timing of the investment of mortgage
proceeds prior to the distribution to Unitholders.
Asset management fees decreased by approximately $182,000 for 2001 as
compared to 2000, primarily due to the reduction in the mortgage base.
Gains on mortgage dispositions increased by approximately $1.3 million for
2001 as compared to 2000 as a result of gains recognized on seven mortgage
prepayments and five mortgage assignments in 2001, as discussed above, compared
to gains recognized on four mortgage prepayments and one assignment in 2000. No
losses were recognized in 2001 compared to loss recognized on one mortgage
prepayment in 2000.
Liquidity and Capital Resources
- -------------------------------
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, are the Partnership's principal sources of cash flows,
and were sufficient for the years ended December 31, 2002, 2001 and 2000 to meet
operating expense requirements. The Partnership anticipates its cash flows will
be sufficient to meet operating expense requirements for 2003.
The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although the
Partnership's Insured Mortgages pay a fixed monthly mortgage 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 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 debentures, the interest rate on 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.
Since the Partnership is obligated to distribute the proceeds of mortgage
prepayments, sales and insurance on Insured Mortgages (as defined in the
Partnership Agreement) to its Unitholders, the size of the Partnership's
portfolio will continue to decrease. The magnitude of the decrease will depend
14
upon the size of the Insured Mortgages which are prepaid, sold or assigned for
insurance proceeds.
Cash flow - 2002 compared to 2001
- ---------------------------------
Net cash provided by operating activities decreased by approximately
$718,000 in 2002 compared to 2001, primarily due to lower mortgage investment
income resulting from a reduction in the mortgage base, partially offset by a
decrease in receivables and other assets. The decrease in receivables and other
assets is primarily due to the receipt of principal and interest previously
accrued on the mortgages awaiting assignment from HUD under the Section 221
Program during 2002, as previously discussed.
Net cash provided by investing activities increased by approximately $6.0
million in 2002 compared to 2001. This increase is primarily due to an increase
in proceeds received from mortgage assignments as discussed above and the net
proceeds from the debentures, as discussed above, partially offset by a decrease
in proceeds received from the prepayment of mortgages as discussed above.
Net cash used in financing activities decreased by approximately $2.1
million in 2002 compared to 2001 due to a reduction in the amount of
distributions paid to partners in 2002 compared to 2001.
Cash flow - 2001 compared to 2000
- ---------------------------------
Net cash provided by operating activities decreased by approximately $1.3
million in 2001 compared to 2000, primarily due to the reduction in mortgage
investment income, as discussed above.
Net cash provided by investing activities increased by approximately $9.7
million in 2001 compared to 2000. This increase is primarily due to an increase
in proceeds received from mortgage prepayments.
Net cash used in financing activities decreased by approximately $8.4
million in 2001 compared to 2000 due to a reduction in the amount of
distributions paid to partners in 2001 compared to 2000.
Critical Accounting Policies
- ----------------------------
The Partnership's significant accounting polices are described in Note 2 to
the Financial Statements. The Partnership believes its most critical accounting
policy (a critical accounting policy being one that is both very important to
the portrayal of the Partnership's financial condition and results of operations
and requires management's most difficult, subjective, or complex judgments)
is the determination of fair value of Insured Mortgages.
- - Fair Value of Insured Mortgages - The Partnership estimates the fair value
of its Insured Mortgages internally. The Partnership uses a discounted cash
flow methodology to estimate the fair value. This requires the Partnership
to make certain estimates regarding discount rates and expected
prepayments. The cash flows were discounted using a discount rate that, in
the Partnership's view, was commensurate with the market's perception of
risk and value. The Partnership used a variety of sources to determine its
discount rate including: (i) institutionally-available research reports,
and (ii) communications with dealers and active insured mortgage security
investors regarding the valuation of comparable securities. Increases in
the discount rate used by the Partnership would generally result in a
corresponding decrease in the fair value of the Partnership's insured
mortgages. Decreases in the discount rate used by the Partnership would
generally result in a corresponding increase in the fair value of the
Partnership's insured mortgages. The Partnership also makes certain
assumptions regarding the prepayment speeds of its Insured Mortgages. In a
low interest rate environment, mortgages are more likely to prepay even if
the mortgage contains prepayment penalties. In general, if the Partnership
increases its assumed prepayment speed, the fair value of the Insured
Mortgages will decrease. If the Partnership decreases its assumed
prepayment speed, the fair value of the Insured Mortgages will increase.
15
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." FIN No. 46
explains how to identify variable interest entities and how an enterprise
assesses its interests in a variable interest entity to decide whether to
consolidate that entity. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. FIN No.
46 is effective immediately for variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. The Interpretation applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The Partnership does not expect the adoption of FIN No. 46 to have a
material effect on its financial position or results of operations.
16
ITEM 7A. 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 December 31, 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 Partnership has changed its method of presenting market risk
disclosures from those disclosures presented in the December 31, 2001 Annual
Report on Form 10-K. The Partnership believes that the market risk disclosures
presented below provide more meaningful information to its Unitholders in
assessing the affect of changes in interest rates on the values of its assets.
As of December 31, 2002, the weighted average life of the U.S. Treasury
securities that were used to value the insured mortgage securities were shorter
than those used at December 31, 2001 due to lower market interest rates and
other loan attributes of the underlying insured mortgage securities, which made
the likelihood of the mortgage assets prepaying greater than the previous year.
If the Partnership assumed that the discount rate used to determine the fair
values of its insured mortgage securities increased by 100 basis points and 200
basis points, the increase in the discount rate would have resulted in a
corresponding decrease in the fair values of its insured mortgage securities by
approximately $1.6 million (or 2.4%) and approximately $3.1 million (or 4.5%),
respectively, as of December 31, 2002. A 100 basis point and 200 basis point
increase in the discount rate would have resulted in a corresponding decrease in
the fair values of the Partnership's insured mortgage securities by
approximately $3.3 million (or 4.0%) and approximately $6.4 million (or 7.6%),
respectively, as of December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in this Annual Report on
Form 10-K commencing on page 28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
On May 8, 2002, the Board of Directors of the General Partner of the
Partnership dismissed Arthur Andersen LLP ("Arthur Andersen") as the
Partnership's independent auditors. Arthur Andersen had served as the
Partnership's independent accountants since 1991.
Arthur Andersen's reports on the Partnership's financial statements for
each of the past two fiscal years did not contain an adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles.
During each of the Partnership's two most recent fiscal years and through
the date of Arthur Andersen's dismissal, there were: (i) no disagreements with
Arthur Andersen on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure which, if not resolved to
Arthur Andersen's satisfaction, would have caused them to make reference to the
subject matter in connection with their report on the Partnership's financial
statements for such years; and (ii) there were no reportable events as defined
in Item 304(a)(1)(v) of Regulation S-K.
17
The Partnership has provided Arthur Andersen with a copy of the foregoing
disclosure. The Partnership requested Arthur Andersen to furnish it with a
letter addressed to the SEC stating whether it agrees with the above statements.
A copy of that letter dated May 9, 2002 was filed as Exhibit 16 to the Form 8-K
filed with the SEC by the Partnership on May 10, 2002.
On June 5, 2002, the General Partner of the Partnership appointed Ernst &
Young LLP to audit the Partnership's financial statements for the year ending
December 31, 2002. During the years ended December 31, 2001 and 2000 and the
subsequent interim period through June 5, 2002, neither the Partnership nor
anyone on its behalf consulted Ernst & Young LLP with respect to the application
of accounting principles to a specified transaction either completed or
proposed, or the type of audit opinion that might be rendered on the
Partnership's financial statements or any other matters or reportable events
listed in Items 304(a)(2)(1) and (11) of Regulation S-K.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no executive officers or directors. The Partnership
does not directly employ any persons responsible for managing or operating the
Partnership or for providing services relating to day to day business affairs.
The affairs of the Partnership are managed by its General Partner, CRIIMI, Inc.
a wholly-owned subsidiary of CRIIMI MAE, a corporation whose shares are listed
on the New York Stock Exchange. CRIIMI, Inc. holds a general partnership
interest of 3.9%.
The business of the Partnership is managed by its General Partner while its
portfolio of mortgages is managed by the Advisor and CMSLP pursuant to the
Advisory Agreements and Sub-Advisory Agreement, respectively, as discussed
above. A wholly-owned subsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc.,
provides personnel and administrative services to the Partnership on behalf of
the General Partner.
The General Partner is also the general partner of AIM 84, AIM 86 and AIM
88, limited partnerships with investment objectives similar to those of the
Partnership.
The Board of Directors of the General Partner has established a committee
(the "Audit Committee") consisting of independent directors (as defined in
Section 121 of the AMEX listing standards). The Audit Committee of the General
Partner has appointed Ernst & Young LLP as the Partnership's independent public
accountants for the fiscal year ending December 31, 2003, such appointment to
continue at the discretion of the Audit Committee.
All directors of the General Partner are elected annually by CRIIMI MAE.
All executive officers serve at the discretion of the General Partner. There are
no family relationships among any directors or executive officers of the General
Partner.
The following table sets forth information concerning the executive
officers and the directors of the General Partner as of March 5, 2003:
Name Age Position
- ---- --- --------
Barry S. Blattman 40 Chairman of the Board of Directors,
President and Chief Executive Officer
David B. Iannarone 42 Executive Vice President,
Chief Operating Officer and a Director
Cynthia O. Azzara 43 Senior Vice President, Chief Financial Officer
and Treasurer
Craig M. Lieberman 41 Senior Vice President and
Chief Portfolio Risk Officer
Brian L. Hanson 41 Senior Vice President
John R. Cooper 55 Director
Robert J. Merrick 57 Director
Robert E. Woods 55 Director
19
Barry S. Blattman has been Chairman of the Board of Directors, Chief
Executive Officer and President of the General Partner since January 23, 2003.
Mr. Blattman is the Managing Partner of Brascan Real Estate Financial Partners.
From 1996 until the end of 2001, Mr. Blattman was a Managing Director of Real
Estate Investment Banking at Merrill Lynch.
David B. Iannarone has served as Chief Operating Officer and Director of
the General Partner since January 2003 and Executive Vice President of the
General Partner since December 2000, as Senior Vice President and General
Counsel of the General Partner from March 1998 to December 2000; and as Vice
President and General Counsel of the General Partner from July 1996 to March
1998.
Cynthia O. Azzara has served as Chief Financial Officer of the General
Partner since 1994, as Senior Vice President of the General Partner since 1995
and Treasurer of the General Partner since 1997.
Craig M. Lieberman has served as Senior Vice President and Chief Portfolio
Risk Officer of the General Partner since February 2003. From 2001 to January
2003, Mr. Lieberman was a managing partner for Quantico Partners. From 1998 to
2001, Mr. Lieberman served as the Director of Commercial Mortgage-Backed
Securitization for First Union Securities. From 1996 to 1998 Mr. Lieberman
practiced as both a partner and counsel in the law firm of Kilpatrick &
Stockton, LLP.
Brian L. Hanson has served as Senior Vice President of the General Partner
since March 1998; and as Group Vice President of the General Partner from March
1996 to March 1998.
John R. Cooper has served as Director of the General Partner since April
2001. Mr. Cooper was Senior Vice President, Finance, of PG&E National Energy
Group, Inc. until February 2003. He had been with PG&E National Energy Group,
Inc. and its predecessor, U.S. Generating Company, since its inception in 1989.
Robert J. Merrick has served as Director of the General Partner since 1997.
Mr. Merrick has served as Chief Credit Officer and Director of MCG Capital
Corporation since February 1998; Executive Vice President from 1985 and Chief
Credit Officer of Signet Banking Corporation through 1997. While at Signet, Mr.
Merrick also served as Chairman of the Credit Policy Committee and member of the
Asset and Liability Committee and the Management Committee.
Robert E. Woods has served as Director of the General Partner since 1998.
Mr. Woods has served as Managing Director and Head of Loan Syndications for the
Americas at Societe Generale, New York since 1997, and as Managing Director,
Head of Real Estate Capital Markets and Mortgage-Backed Securities division at
Citicorp from 1991 to 1997.
Section 16(a) Beneficial Ownership Reporting Compliance - Section 16 of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") requires each
director and executive officer of the General Partner and each person who owns
more than 10% of the Partnership's Units to report to the SEC by a specified
date, his, her or its beneficial ownership of, and certain transactions in the
Partnership's Units. Based solely on its review of Forms 3, 4 and 5 and
amendments thereto furnished to the Partnership, and written representations
from certain reporting persons that no Form 5's were required for those persons,
the Partnership believes that all directors, executive officers and beneficial
owners of more than 10% of the Partnership's Units have filed on a timely basis
Forms 3, 4 and 5 as required in the fiscal year ended December 31, 2002.
20
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have any directors or executive officers. The
Partnership does not directly employ any persons responsible for managing or
operating the Partnership or for providing services relating to day to day
business affairs. The General Partner provides such services for the
Partnership. None of the directors or executive officers of the General Partner,
however, received compensation from the Partnership, and the General Partner
does not receive reimbursement from the Partnership for any portion of their
salaries or other compensation. The Partnership's portfolio of mortgages is
managed by the Advisor and CMSLP pursuant to the Advisory Agreements and
Sub-Advisory Agreement, respectively, as discussed above. A wholly-owned
subsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc. provides personnel and
administrative services to the Partnership on behalf of the General Partner. The
Partnership reimburses CRIIMI MAE Management, Inc. for these services on an
actual cost basis.
The fee paid by the Partnership to the Advisor for services performed under
the Advisory Agreements (the "Advisory Fee"), is equal to 0.95% of the
Partnership's Total Invested Assets (as defined in the Partnership Agreement).
The Advisor pays CMSLP as sub-advisor, a fee of 0.28% (the "Sub-Advisory Fee")
of Total Invested Assets for services performed under the Sub-Advisory Agreement
from its Advisory Fee. The Partnership is not liable for paying the Sub-Advisory
Fee to CMSLP. Additional information concerning these fees is contained in Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and in Note 8 of the Notes to Financial Statements (filed
in response to Item 8 hereof), all of which are incorporated by reference
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT
AND RELATED UNITHOLDER MATTERS
The Partnership does not provide for equity compensation plans.
(a) As of March 5, 2003, no person was known by the Partnership to be the
beneficial owner of more than five percent (5%) of the outstanding Units of
the Partnership.
(b) The following table sets forth certain information regarding the beneficial
ownership of the Partnership's Units as of March 5, 2003 by each person
known by the Partnership to be the beneficial owner of more than 5% of its
Units, each director of the General Partner, each named executive officer
of the General Partner, and by affiliates of the Partnership. Unless
otherwise indicated, each Unitholder has sole voting and investment power
with respect to the Units beneficially owned.
Amount and Nature
of Units Percentage of Units
Name Beneficially Owned Outstanding
- ---- ------------------ -----------
CRIIMI MAE 4,000 *
* Less than 1%
(c) There are no arrangements known to the Partnership, the operation of which
may at any subsequent date result in a change in control of the
Partnership.
21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others.
Note 8 of the Notes to Financial Statements of the Partnership contains a
discussion of the amounts, fees and other compensation paid or accrued by
the Partnership to the directors and executive officers of the General
Partner and their affiliates, and is hereby incorporated by reference
herein.
(b) Certain business relationships.
Other than as set forth in Item 11 of this Annual Report on Form 10-K which
is hereby incorporated by reference herein, the Partnership has no business
relationship with entities of which the executive officers, directors or
equity owners of the General Partner of the Partnership are executive
officers, directors or equity owners.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Annual Report on Form 10-K,
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.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements:
Page
Description Number
----------- ------
Balance Sheets as of December 31, 2002 and 2001.................................................31
Statements of Income and Comprehensive Income for the years ended December 31, 2002,
2001, and 2000 ..............................................................................32
Statements of Changes in Partners' Equity for the years ended December 31, 2002, 2001
and 2000.....................................................................................33
Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000...................34
Notes to Financial Statements...................................................................35
(a)(2) Financial Statement Schedules:
IV - Mortgage Loans on Real Estate........................................................48
All other schedules have been omitted because they are not
applicable, not required, or the information is included in the
Financial Statements or Notes thereto.
(a)(3) Exhibits:
4.0 Amended and Restated Certificates of Limited Partnership are
incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-11 (No. 2-93294) dated January 28, 1985 (such
Registration Statement, as amended, is referred to herein as the
"Registration Statement").
4.1 Second Amended and Restated Partnership Agreement is incorporated by
reference to Exhibit 3 to the Registration Statement.
4.2 Amendment No. 1 to the Second Amended and Restated Partnership
Agreement is incorporated by reference to Exhibit 4(a) to the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1986.
4.3 Amendment No. 2 to the Second Amended and Restated Partnership
Agreement is incorporated by reference to Exhibit 4(b) to the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1986.
4.4 Amendment No. 3 dated February 12, 1990, to the Second Amended and
Restated Agreement of Limited Partnership of the Partnership
incorporated by reference to Exhibit 4(c) to the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1989.
23
10.1 Amended and Restated Origination and Acquisition Services Agreement,
dated as of January 8, 1985, between the Partnership and Integrated
Funding, Inc., incorporated by reference to Exhibit 10(b) to the
Registration Statement.
10.2 Amended and Restated Management Services Agreement, dated as of
January 8, 1985, between the Partnership and Integrated Funding, Inc.,
incorporated by reference to Exhibit 10(c) to the Registration
Statement.
10.3 Amended and Restated Disposition Services Agreement, dated as of
January 8, 1985, between the Partnership and Integrated Funding, Inc.,
incorporated by reference to Exhibit 10(d) to the Registration
Statement.
10.4 Agreement, dated as of January 8, 1985, among the former managing
general partner, the former associate general partner and Integrated
Resources, Inc., incorporated by reference to Exhibit 10(e) to the
Registration Statement.
10.5 Reinvestment Plan, incorporated by reference to the Prospectus
contained in the Registration Statement.
10.6 Declaration of Trust and Pooling Servicing Agreement dated as of July
1, 1982 as to Pass-Through Certificates, is incorporated by reference
to Exhibit 10(h) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.
10.7 Pages A-1 - A-5 of the Partnership Agreement of Registrant,
incorporated by reference to Exhibit 28 to the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1990.
10.8 Purchase Agreement among AIM Acquisition, the former managing general
partner, the former corporate general partner, Integrated Funding,
Inc. and Integrated Resources, Inc. dated as of December 13, 1990, as
amended January 9, 1991, incorporated by reference Exhibit 28(a) to
the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
10.9 Purchase Agreement among CRIIMI, Inc., AIM Acquisition, the former
managing general partner, the former corporate general partner,
Integrated Funding, Inc. and Integrated dated as of December 13, 1990
and executed as of March 1, 1991, incorporated by reference to Exhibit
28(b) to the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1990.
10.10 Amendment to Partnership Agreement dated September 4, 1991,
incorporated by reference to Exhibit 28(c), to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1991.
10.11 Sub-Management Agreement by and between AIM Acquisition and CRI/AIM
Management, Inc., dated as of March 1, 1991, incorporated by reference
to Exhibit 28(f) to the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1992.
16.0 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated May 9, 2002, regarding the General Partner's decision
to change its certifying accountant, incorporated by reference to
Exhibit 16 to the Partnership's Form 8-K filed on May 10, 2002.
24
99.0 Letter to Securities and Exchange Commission from the Partnership
dated March 20, 2002, regarding the representation received from
Arthur Andersen LLP in performing the audit of the December 31, 2001
financial statements, incorporated by reference to Exhibit 99.0 to the
Partnership's Annual Report on Form 10-K for the year ended December
31, 2001.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 from Barry S. Blattman, Chief Executive Officer of the General
Partner (Filed herewith).
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 from Cynthia O. Azzara, Chief Financial Officer of the General
Partner (Filed herewith).
(b) Reports on Form 8-K filed during the last quarter of the fiscal year: None.
All other items are not applicable.
25
SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Barry S. Blattman, his attorney-in-fact,
each with the power of substitution for him in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K and to file the same with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN INSURED MORTGAGE
INVESTORS - SERIES 85, L.P.
(Registrant)
By: CRIIMI, Inc.
General Partner
March 19, 2003 /s/Barry S. Blattman
- -------------- --------------------------------------
DATE Barry S. Blattman
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
March 25, 2003 /s/Cynthia O. Azzara
- -------------- --------------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
March 19, 2003 /s/David B. Iannarone
- -------------- --------------------------------------
DATE David B. Iannarone
Executive Vice President,
Chief Operating Officer and a Director
March 19, 2003 /s/John R. Cooper
- -------------- --------------------------------------
DATE John R. Cooper
Director
March 19, 2003 /s/Robert J. Merrick
- -------------- -------------------------------------
DATE Robert J. Merrick
Director
March 19, 2003 /s/Robert E. Woods
- -------------- -------------------------------------
DATE Robert E. Woods
Director
26
CERTIFICATION
I, Barry Blattman, Chairman of the Board, Chief Executive Officer and President,
certify that:
1. I have reviewed this Annual Report on Form 10-K of American Insured
Mortgage Investors-Series 85, L.P.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
AMERICAN INSURED MORTGAGE
INVESTORS - SERIES 85, L.P.
(Registrant)
By: CRIIMI, Inc.
General Partner
Date: March 19, 2003 /s/Barry S. Blattman
-------------- -------------------------------------
Barry S. Blattman
Chairman of the Board,
Chief Executive Officer and President
27
CERTIFICATION
I, Cynthia O. Azzara, Senior Vice President, Chief Financial Officer and
Treasurer, certify that:
1. I have reviewed this Annual Report on Form 10-K of American Insured
Mortgage Investors-Series 85, L.P.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
AMERICAN INSURED MORTGAGE
INVESTORS - SERIES 85, L.P.
(Registrant)
By: CRIIMI, Inc.
General Partner
Date: March 25, 2003 /s/Cynthia O. Azzara
-------------- ----------------------------------------------
Cynthia O. Azzara
Senior Vice President, Chief Financial Officer
and Treasurer
28
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
Financial Statements
as of December 31, 2002 and 2001
and for the Years Ended
December 31, 2002, 2001 and 2000
29
REPORT OF INDEPENDENT AUDITORS
Partners
American Insured Mortgage Investors - Series 85, L.P.
We have audited the accompanying balance sheets of American Insured
Mortgage Investors - Series 85, L.P. (the Partnership) as of December 31, 2002,
and the related statements of income and comprehensive income, changes in
partners' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit. The financial statements
of the Partnership as of December 31, 2001, and for the years ended December 31,
2001 and 2000, were audited by other auditors who have ceased operations and
whose report dated March 4, 2002, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the financial position of the Partnership at
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/Ernst & Young LLP
McLean, Virginia
March 14, 2003
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of American Insured Mortgage Investors - Series 85, L.P.:
We have audited the accompanying balance sheets of American Insured
Mortgage Investors - Series 85, L.P. (the "Partnership") as of December 31, 2001
and 2000, and the related statements of income and comprehensive income, changes
in partners' equity and cash flows for the years ended December 31, 2001, 2000
and 1999. These financial statements and the schedule referred to below are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Partnership as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years ended December 31, 2001, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule IV-Mortgage Loans on Real Estate
as of December 31, 2001 is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations and is not a required
part of the basic financial statements. The information in this schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Vienna, Virginia
March 4, 2002
- --------------------------------------------------------------------------------
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the Partnership's filing of its Annual Report on Form 10-K for
the year ended December 31, 2001. This audit report has not been reissued by
Arthur Andersen LLP in connection with this Annual Report on Form 10-K. See
exhibit 16.0 for further discussion.
31
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
BALANCE SHEETS
December 31, December 31,
2002 2001
------------ -------------
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value:
Acquired insured mortgages $ 33,849,089 $ 45,845,197
Originated insured mortgages 15,986,295 15,734,485
------------ ------------
49,835,384 61,579,682
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount and premium:
Acquired insured mortgages 7,176,274 8,914,573
Originated insured mortgages 9,311,907 12,430,002
------------ ------------
16,488,181 21,344,575
Cash and cash equivalents 10,448,516 4,366,085
Receivables and other assets 1,465,453 8,394,392
Investment in FHA debenture - 2,385,233
------------ ------------
Total assets $ 78,237,534 $ 98,069,967
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 10,181,484 $ 1,885,460
Accounts payable and accrued expenses 115,799 121,659
Due to affiliate - 1,235,104
------------ ------------
Total liabilities 10,297,283 3,242,223
------------ ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units
authorized, 12,079,514 Units issued and outstanding 73,382,252 99,801,805
General partner's deficit (6,853,298) (5,781,121)
Accumulated other comprehensive income 1,411,297 807,060
------------ ------------
Total partners' equity 67,940,251 94,827,744
------------ ------------
Total liabilities and partners' equity $ 78,237,534 $ 98,069,967
============ ============
The accompanying notes are an integral part
of these financial statements.
32
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the years ended December 31,
2002 2001 2000
------------ ------------ ------------
Income:
Mortgage investment income $ 6,168,254 $ 7,983,600 $ 9,597,605
Interest and other income 274,342 541,979 380,932
------------ ------------ ------------
6,442,596 8,525,579 9,978,537
------------ ------------ ------------
Expenses:
Asset management fee to related parties 744,733 959,934 1,142,121
General and administrative 411,226 382,296 397,713
------------ ------------ ------------
1,155,959 1,342,230 1,539,834
------------ ------------ ------------
Earnings before gains (losses)
on mortgage dispositions 5,286,637 7,183,349 8,438,703
Mortgage dispositions
Gains 1,859,749 1,785,376 467,414
Losses (8,498) - (39,819)
------------ ------------ ------------
Net earnings $ 7,137,888 $ 8,968,725 $ 8,866,298
============ ============ ============
Other comprehensive income (loss) - adjustment to unrealized
gains on investments in insured mortgages 604,237 (1,114,340) 1,907,406
------------ ------------ ------------
Comprehensive income $ 7,742,125 $ 7,854,385 $ 10,773,704
============ ============ ============
Net earnings allocated to:
Limited partners - 96.1% $ 6,859,510 $ 8,618,945 $ 8,520,512
General partner - 3.9% 278,378 349,780 345,786
------------ ------------ ------------
$ 7,137,888 $ 8,968,725 $ 8,866,298
============ ============ ============
Net earnings per Limited
Partnership Unit - Basic $ 0.57 $ 0.71 $ 0.71
============ ============ ============
The accompanying notes are an integral part
of these financial statements.
33
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the years ended December 31, 2002, 2001, 2000
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
------------- ------------- ------------- -------------
Balance, January 1, 2000 $ (4,751,114) $ 125,182,237 $ 13,994 $ 120,445,117
Net earnings 345,786 8,520,512 - 8,866,298
Adjustment to unrealized gains on
investments in insured mortgages - - 1,907,406 1,907,406
Distributions paid or accrued of $1.61 per Unit,
including return of capital of $0.90 per Unit (789,254) (19,448,018) - (20,237,272)
------------- ------------- ------------- -------------
Balance, December 31, 2000 (5,194,582) 114,254,731 1,921,400 110,981,549
Net earnings 349,780 8,618,945 - 8,968,725
Adjustment to unrealized gains on
investments in insured mortgages - - (1,114,340) (1,114,340)
Distributions paid or accrued of $1.91 per Unit,
including return of capital of $1.20 per Unit (936,319) (23,071,871) - (24,008,190)
------------- ------------- ------------- -------------
Balance, December 31, 2001 (5,781,121) 99,801,805 807,060 94,827,744
Net earnings 278,378 6,859,510 - 7,137,888
Adjustment to unrealized gains on
investments in insured mortgages - - 604,237 604,237
Distributions paid or accrued of $2.755 per Unit,
including return of capital of $2.185 per Unit (1,350,555) (33,279,063) - (34,629,618)
------------- ------------- ------------- -------------
Balance, December 31, 2002 $ (6,853,298) $ 73,382,252 $ 1,411,297 $ 67,940,251
============= ============= ============= =============
Limited Partnership Units outstanding - Basic, as of
December 31, 2002, 2001 and 2000 12,079,514
==========
The accompanying notes are an integral part
of these financial statements.
34
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF CASH FLOWS
For the years ended December 31,
2002 2001 2000
--------------------------------------------
Cash flows from operating activities:
Net earnings $ 7,137,888 $ 8,968,725 $ 8,866,298
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Losses on mortgage dispositions 8,498 - 39,819
Gains on mortgage dispositions (1,859,749) (1,785,376) (467,414)
Changes in assets and liabilities:
Decrease (increase) in receivables and other assets 913,856 (315,436) (196,242)
(Decrease) increase in accounts payable and accrued expenses (5,860) 8,795 (34,609)
Decrease in due to affiliate (42,487) (7,003) -
------------ ------------ ------------
Net cash provided by operating activities 6,152,146 6,869,705 8,207,852
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from mortgage prepayments 14,111,131 19,316,901 9,346,682
Proceeds from mortgage assignments 10,190,539 - -
Receipt of mortgage principal from scheduled payments 769,593 955,959 1,182,259
Proceeds from redemption of debenture 2,385,233 - -
Debenture proceeds paid to affiliate (1,192,617) - -
------------ ------------ ------------
Net cash provided by investing activities 26,263,879 20,272,860 10,528,941
------------ ------------ ------------
Cash flows from financing activities:
Distributions paid to partners (26,333,594) (28,407,597) (36,829,320)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,082,431 (1,265,032) (18,092,527)
Cash and cash equivalents, beginning of year 4,366,085 5,631,117 23,723,644
------------ ------------ ------------
Cash and cash equivalents, end of year $ 10,448,516 $ 4,366,085 $ 5,631,117
============ ============ ============
Non-cash investing activity:
7.125% debenture received from HUD in exchange for
the mortgage on Fox Run Apartments $ - $ - $ 2,385,233
Portion of 7.125% debenture due to affiliate, AIM 84 - - (1,242,107)
Portion of 7.125% - 7.5% debentures due from a third party
in exchange for the mortgages on Summit Square Manor, Park Place,
Park Hill Apartments, Fairfax House and Woodland Villas - 6,759,242 -
Portion of 7.5% debenture due from a third party in exchange
for the mortgage on Fairlawn II 744,159 - -
The accompanying notes are an integral part
of these financial statements.
35
AMERICAN MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
American Insured Mortgage Investors - Series 85, L.P. (the "Partnership")
was formed pursuant to a limited partnership agreement ("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.
36
2. SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
--------------------
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.
Investment in Insured Mortgages
- -------------------------------
The Partnership's investment in Insured Mortgages is comprised 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"),
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") ("GNMA Mortgage-Backed Securities") and FHA-insured
mortgage loans ("FHA-Insured Loans"). The mortgages underlying the FHA-Insured
Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are
primarily non-recourse first liens on multifamily residential developments or
retirement homes.
Payments of principal and interest on FHA-Insured Certificates and
FHA-Insured Loans are insured by the United States Department of Housing and
Urban Development ("HUD") pursuant to Title 2 of the National Housing Act.
Payments of principal and interest on GNMA Mortgage-Backed Securities are
guaranteed by GNMA pursuant to Title 3 of the National Housing Act.
As of December 31, 2002, the weighted average remaining term of the
Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured
Certificates is approximately 27 years. However, the Partnership Agreement
states that the Partnership will terminate in approximately 7 years on December
31, 2009, unless terminated earlier under the provisions of the Partnership
Agreement. As the Partnership is anticipated to terminate prior to the weighted
average remaining term of its investments in GNMA Mortgage-Backed Securities and
FHA-Insured Certificates, the Partnership does not have the ability or intent,
at this time, to hold these investments to maturity. Consequently, the General
Partner believes that the Partnership's investments in GNMA Mortgage-Backed
Securities and FHA-Insured Certificates should be classified as available for
sale. Although the Partnership's investments in GNMA Mortgage-Backed Securities
and FHA-Insured Certificates are classified as available for sale for financial
statement purposes, the General Partner does not intend to voluntarily dispose
of these assets other than those which may be assigned to HUD as a result of a
default or those which are eligible to be put to FHA at the expiration of 20
years from the date of the final endorsement under Section 221 (g)(4) of the
National Housing Act (the "Section 221 program"), as discussed in Note 5.
In connection with this classification, all of the Partnership's
investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates are
recorded at fair value as of December 31, 2002 and 2001, with the net unrealized
gains and losses on these assets reported as other comprehensive income and as a
separate component of partners' equity. Subsequent increases or decreases in the
fair value of GNMA Mortgage-Backed Securities and FHA-Insured Certificates,
classified as available for sale, will be included as a separate component of
partners' equity. Realized gains and losses on GNMA Mortgage-Backed Securities
and FHA-Insured Certificates, classified as available for sale, will continue to
be reported in earnings.
As of December 31, 2002 and 2001, the Partnership's Investment in
FHA-Insured Loans is recorded at amortized cost.
37
The amortized cost of the investments in GNMA Mortgage-Backed Securities,
FHA-Insured Certificates and FHA-Insured Loans is adjusted for amortization of
discounts and premiums to maturity. Such amortization is included in mortgage
investment income.
Mortgage investment income consists of amortization of the discount or
premiums plus the stated mortgage interest payments received or accrued. The
difference between the cost and the unpaid principal balance at the time of
purchase is carried as a discount or premium and amortized over the remaining
contractual life of the mortgage using the effective interest method. The
effective interest method provides a constant yield of income over the term of
the mortgage.
Gains from dispositions of mortgage investments are recognized upon the
receipt of cash or debentures.
Losses on dispositions of mortgage investments are recognized when it
becomes probable that a mortgage will be disposed of and that the disposition
will result in a loss. In the case of Insured Mortgages fully insured by HUD,
the Partnership's maximum exposure for purposes of determining the loan losses
would generally be an assignment fee charged by HUD representing approximately
1% of the unpaid principal balance of the Insured Mortgage at the date of
default, plus the unamortized balance of acquisition fees and closing costs paid
in connection with the acquisition of the Insured Mortgage and the loss of
approximately 30 days accrued interest.
Investment in FHA Debenture
- ---------------------------
The Partnership may receive debentures by assigning current mortgages to
HUD under the Section 221 program, as discussed in Note 5. In addition, the
Partnership may receive debentures by assigning a defaulted mortgage to HUD in
order to collect the amount of delinquent principal and interest. In the case of
a default assignment, the mortgagee may elect to have the claim settled in cash
or by the issuance of a debenture. Debentures are obligations of the mortgage
insurance funds and are unconditionally guaranteed by the United States. The
term of these debentures are usually more than 7 years and the interest rate is
set based upon the interest rate in effect at the commitment date to provide
insurance or at the final endorsement date, whichever is greater. The
Partnership classifies its Investment in FHA Debenture as an available for sale
debt security with changes in fair value recorded as an adjustment to equity and
other comprehensive income.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of money market funds and time and demand
deposits with original maturities of three months or less.
Income Taxes
- ------------
No provision has been made for Federal, state or local income taxes in the
accompanying statements of income and comprehensive income since, as a
pass-through entity, all income taxes assessed on the Partnership's income are
the responsibility of its Unitholders.
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued FASB Interpretation (or FIN) No. 46,
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." FIN No. 46
explains how to identify variable interest entities and how an enterprise
assesses its interests in a variable interest entity to decide whether to
consolidate that entity. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. FIN No.
38
46 is effective immediately for variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. The Interpretation applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The Partnership does not expect the adoption of FIN No. 46 to have a
material effect on its financial position or results of operations.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of the Partnership's financial
instruments are presented in accordance with GAAP which define fair value as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
These estimated fair values, however, do not represent the liquidation value or
the market value of the Partnership.
As of December 31, 2002 As of December 31, 2001
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- -------------- ------------- --------------
Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed
Securities:
Acquired Insured Mortgages $ 32,449,759 $ 33,849,089 $ 44,640,062 $ 45,845,197
Originated Insured Mortgages 15,974,329 15,986,295 16,132,560 15,734,485
------------- -------------- ------------- --------------
$ 48,424,088 $ 49,835,384 $ 60,772,622 $ 61,579,682
============= ============== ============= ==============
Investment in FHA-Insured Loans:
Acquired Insured Mortgages $ 7,176,274 $ 8,513,052 $ 8,914,573 $ 10,451,178
Originated Insured Mortgages 9,311,907 9,470,182 12,430,002 12,122,221
------------- -------------- ------------- --------------
$ 16,488,181 $ 17,983,234 $ 21,344,575 $ 22,573,399
============= ============== ============= ==============
Cash and cash equivalents $ 10,448,516 $ 10,448,516 $ 4,366,085 $ 4,366,085
============= ============== ============= ==============
Investment in Debenture $ - $ - $ 2,385,233 $ 2,385,233
============= ============== ============= ==============
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Investment in FHA-Insured Certificates,
GNMA Mortgage-Backed Securities, FHA-Insured Loans and Debenture
- ------------------------------------------------------------------------
The fair values of the FHA-Insured Certificates, GNMA Mortgage-Backed
Securities and FHA-Insured Loans are priced internally. The Partnership used a
discounted cash flow methodology to estimate the fair values; the cash flows
were discounted using a discount rate that, in the Partnership's view, was
commensurate with the market's perception of risk and value. The Partnership
used a variety of sources to determine its discount rate including: (i)
institutionally-available research reports, and (ii) communications with dealers
and active insured mortgage security investors regarding the valuation of
comparable securities. The fair value of a debenture is based upon the prices of
other comparable securities that trade in the market. The fair value of a
debenture with a short term call date from HUD is equal to its face value.
Cash and cash equivalents
- -------------------------
The carrying amount approximates fair value because of the short maturity
of these instruments.
39
4. COMPREHENSIVE INCOME
Comprehensive income includes net earnings as currently reported by the
Partnership adjusted for other comprehensive income. Other comprehensive income
for the Partnership consists of changes in unrealized gains and losses related
to the Partnership's Insured Mortgages and debenture accounted for as available
for sale. The table below details other comprehensive income for the periods
presented into the following two categories: (1) the change to unrealized gains
and losses that relate to Insured Mortgages which were disposed of during the
period with the resulting realized gain or loss reflected in net earnings
(reclassification adjustments) and (2) the change in the unrealized gains or
losses related to those investments that were not disposed of during the period.
2002 2001 2000
---- ---- ----
Reclassification adjustment for (gains) losses
included in net income $ (768,721) $ (1,149,729) $ 114,365
Unrealized holding gains arising during
the period 1,372,958 35,389 1,793,041
------------ ------------ ------------
Net adjustment to unrealized gains $ 604,237 $ (1,114,340) $ 1,907,406
============ ============ ============
5. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-BACKED
SECURITIES
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:
December 31,
2002 2001
---- ----
Acquired Mortgages:
Number of
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates (1) through (6) 17 26
Amortized Cost $ 32,449,759 $ 44,640,062
Face Value 33,076,449 46,215,896
Fair Value 33,849,089 45,845,197
Originated Mortgages:
Number of
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $ 15,974,329 $ 16,132,560
Face Value 15,974,328 16,132,560
Fair Value 15,986,295 15,734,485
40
Listed below is a summary of prepayments during 2002 on Insured Mortgages:
(Dollars in thousands, except per unit amounts)
Date Distribution
Net Proceeds Gain/ Dist./ Declaration Payment
Complex Name Proceeds Received Loss Unit Date Date
------------ -------- -------- ---- ---- ---- ----
(1) Garden Court Apartments $1,152 Apr 2002 $ 9 $0.09 Apr 2002 Aug 2002
(2) Franklin Plaza 5,029 Sep 2002 (8) 0.40 Oct 2002 Feb 2003
(3) Rock Glen Apartments 1,009 Oct 2002 117 0.08 Nov 2002 Feb 2003
(4) Highland Oaks Apartments 888 Nov 2002 96 0.07 Dec 2002 Feb 2003
(5) Walnut Hills Apartments 454 Dec 2002 83 0.04 Jan 2003 May 2003
(6) Four mortgages were approved for assignment to HUD under the section 221
Program, as discussed below in "Redemption of debentures".
As of March 1, 2003, all of the fully insured GNMA Mortgage-Backed
Securities and FHA-Insured Certificates are current with respect to the payment
of principal and interest.
In addition to base interest payments under Originated Insured Mortgages,
FHA-Insured Loans, 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 years ended December 31, 2002, 2001 and 2000, the
Partnership received $0 from the Participations.
The Section 221 Program
-----------------------
Certain Insured Mortgages held by the Partnership are eligible for
assignment to HUD under the Section 221(g)(4) program of the National Housing
Act (the "Section 221 Program.") A mortgagee has the right to assign a mortgage
("put") to the United States Department of Housing and Urban Development ("HUD")
at the expiration of 20 years from the date of final endorsement ("Anniversary
Date") if the mortgage is not in default at such time. The mortgagee may
exercise its option to put the mortgage to HUD during the one year period
subsequent to the Anniversary Date. This assignment procedure is applicable to
an Insured Mortgage, which had a firm or conditional commitment for HUD
insurance benefits on or before November 30, 1983. Any mortgagee electing to
assign an Insured Mortgage to HUD receives, in exchange therefor, debentures
having a total face value equal to (i) the then outstanding principal balance of
the Insured Mortgage (ii) plus accrued interest on the mortgage to the date of
assignment ("Debenture Issuance Date"). These debentures generally mature 10
years from the date of assignment and bear interest at a rate announced
semi-annually by HUD in the Federal Register ("going Federal rate") at such
date. Generally, the Partnership is not the named mortgagee for the FHA-Insured
Certificates. In this case, the HUD debentures are generally issued to an
unrelated third party that is the named mortgagee. The servicer of the
applicable mortgage is responsible for delivering to the Partnership all HUD
insurance claim proceeds. The debenture interest is paid to the Partnership in
the month it is received by the servicer. The debenture proceeds are paid to the
Partnership in the month the debenture is redeemed by HUD or sold by the
servicer. Based on the recommendation of CMSLP, the sub-advisor, and the consent
of the Advisor the General Partner may elect to put Insured Mortgages to HUD,
based upon, in general, but not limited to, (i) the interest rates on mortgages,
(ii) the interest rates on debentures issued by HUD and (iii) the costs and
risks associated with continuing to hold the Insured Mortgages.
Once the servicer of an Insured Mortgage has filed an application for
insurance benefits ("HUD put date") under the Section 221 program on behalf of
the Partnership, the Partnership will no longer receive the monthly principal
and interest on the applicable mortgage, and instead, HUD will begin receiving
the monthly principal and interest. HUD issues debentures at the time the
mortgage is assigned to HUD (approximately 30 days after the HUD put date);
however, the debentures are not transferred to the mortgagee until HUD completes
its assignment process of the Insured Mortgage. Based on the General Partner's
experience, HUD's assignment process is generally six to eighteen months. After
41
HUD completes its assignment process for the Insured Mortgage, HUD transfers to
the mortgagee (i) HUD debentures, as discussed above, (ii) plus cash for accrued
interest on the debentures at the going Federal rate, from the Debenture
Issuance Date to the most current interest payment date. Thereafter, the
mortgagee receives interest on the debentures on the semi-annual payment dates
of January 1 and July 1. The going Federal rate for HUD debentures issued under
the Section 221 Program for the period January 1 through June 30, 2002 was
6.375%; for the period July 1 through December 31, 2002 it was 6.625%; and for
the period January 1 through June 30, 2003 it is 5.75%. The Partnership will
recognize a gain on a mortgage assignment at the time it receives notification
that the assignment has been approved. HUD assignment approval generally occurs
when HUD transfers the debentures to the mortgagee and/or when the Partnership
receives cash for the accrued interest on the debentures. The Partnership
recognizes a loss on a mortgage assignment when it becomes probable that a loss
will be incurred. The gain or loss recognized is generally equal to proceeds
received from HUD, as discussed above, less the amortized cost of the Insured
Mortgage.
a. Redemption of debentures
------------------------
The following list represents debentures issued in 2001 and redeemed in
January 2002. In addition, the Partnership received interest on these debentures
in 2002: (1) a distribution of approximately $0.02 per unit of interest related
to the debentures issued in exchange for the mortgages on Park Hill Apartments,
Fairfax House and Woodland Villas was declared in January 2002, and (2) a
distribution of approximately $0.02 per unit of interest related to the
debentures issued in exchange for the mortgages on Summit Square Manor, Park
Place, Park Hill Apartments, Fairfax House and Woodland Villas was declared in
February 2002. These distributions were paid in May 2002.
(Dollars in thousands, except per unit amounts)
Debenture Dist.
Interest Net HUD put Dist./ Declaration Payment
Complex Name Rate Proceeds Date Unit Date Date
- ------------ ---- -------- ---- ---- ---- ----
Summit Square Manor 7.125% $ 1,883 Jun 2000 $ 0.150 Feb 2002 May 2002
Park Place 7.125% 746 Jun 2000 0.060 Feb 2002 May 2002
Park Hill Apartments 7.500% 1,721 Sep 2000 0.140 Feb 2002 May 2002
Fairfax House 7.500% 2,109 Sep 2000 0.170 Feb 2002 May 2002
Woodland Villas 7.125% 300 Apr 2001 0.025 Feb 2002 May 2002
------- -------
$ 6,759 $ 0.545
======= =======
The following list represents debentures issued in January 2002 and
redeemed in July 2002. The aggregate gain of $497,000 was recognized in the
first quarter of 2002, when the Partnership received approximately $286,000 of
accrued interest in cash on these debentures. A distribution related to this
accrued debenture interest of approximately $0.02 per Unit was declared in March
2002 and paid in May 2002. Net proceeds represent (i) the Partnership's
beneficial interest in the face value of the debenture, plus (ii) interest
earned on the debenture during the HUD assignment process, less (iii) net
mortgage investment income due on the applicable mortgage during the HUD
assignment process.
(Dollars in thousands, except per unit amounts)
Debenture Gain Dist
Interest Net HUD put 1st Qtr. Dist./ Declaration Payment
Complex Name Rate Proceeds Date 2002 Unit Date Date
- ------------ ---- -------- ---- ----- ----- ---- ----
Country Club Terrace Apts. 7.500% $1,425 Sep 2000 $ 178 $0.12 Aug 2002 Nov 2002
Nevada Hills Apartments 7.500% 1,134 Dec 2000 154 0.09 Aug 2002 Nov 2002
Dunhaven Apartments 7.125% 872 Jan 2001 165 0.07 Aug 2002 Nov 2002
------ ----- -----
$3,431 $ 497 $0.28
====== ===== =====
42
Subsequent to December 31, 2002, a 7.5% debenture of approximately
$758,000, issued in July 2002 for the mortgage on Fairlawn II was redeemed by
HUD in January 2003. The Partnership recognized a gain of approximately $95,000
in the third quarter of 2002, when the Partnership received approximately
$100,000 of accrued interest in cash on this debenture. A distribution related
to this accrued debenture interest of approximately $0.01 per Unit was declared
in August 2002 and paid in November 2002. A distribution of approximately $0.06
per Unit related to the debenture proceeds was declared in February 2003 and is
expected to be 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. The 7.5%
debenture proceeds and accrued interest are included in receivables and other
assets in the Partnership's balance sheet as of December 31, 2002.
b. Mortgages in the HUD assignment process
---------------------------------------
The Mortgage on Executive House was put to HUD under the Section 221
Program by the servicer in April 2002. The face value of this mortgage was
approximately $805,000 as of the HUD put date. The Partnership no longer
receives monthly principal and interest from mortgages that are put to HUD under
the Section 221 Program. HUD receives the monthly principal and interest and the
Partnership earns semi-annual interest on debentures issued by HUD, as discussed
above. The Partnership has not received approval for this assignment as of March
1, 2003, and will continue to accrue interest on the mortgage until the
debenture is transferred to the Partnership and it begins receiving the
debenture interest. The fair value of this mortgage is included in Investment in
FHA-Insured Certificates and GNMA Mortage-Backed Securities, Acquired Insured
Mortgages in the Partnership's balance sheet as of December 31, 2002.
c. Remaining mortgages eligible for assignment
-------------------------------------------
The Partnership's mortgage portfolio includes five FHA-Insured Certificates
eligible under the Section 221 Program with anniversary dates in April 2002. At
this time, the Partnership does not expect these mortgages to be put to HUD
since it owns less than 34% of these FHA-Insured Certificates and the other
certificate holders have not yet elected to put these mortgages to HUD. The
Partnership does not own any other FHA-Insured Certificates or GNMA
Mortgage-Backed Securities eligible to be put to HUD.
6. INVESTMENT IN FHA-INSURED LOANS
Insured FHA-Insured Loans
- -------------------------
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
December 31,
2002 2001
---- ----
Fully Insured Acquired Loans:
Number of Loans (2)(3) 6 7
Amortized Cost $ 7,176,274 $ 8,914,573
Face Value 8,519,762 10,632,937
Fair Value 8,513,052 10,451,178
Fully Insured Originated Loans:
Number of Loans (1) 2 3
Amortized Cost $ 9,311,907 $ 12,430,002
Face Value 9,059,734 12,132,653
Fair Value 9,470,182 12,122,221
(1) In January 2002, the mortgage on Longleaf Lodge was prepaid. The
Partnership received net proceeds of approximately $3.7 million and
recognized a gain of approximately $672,000 during the year ended December
31, 2002. A distribution of approximately $0.29 per Unit related to the
prepayment of this mortgage was declared in January 2002 and paid to
Unitholders in May 2002.
43
(2) In December 2002, the mortgage on Bay Pointe Apartments was prepaid. The
Partnership received net proceeds of approximately $1.9 million and
recognized a gain of approximately $290,000 during the year ended December
31, 2002. A distribution of approximately $0.15 per Unit related to the
prepayment of this mortgage was declared in December 2002 and paid to
Unitholders in February 2003.
(3) 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 expected to be received during the next 12
months. The Partnership expects to recognize a gain of approximately
$228,000 during the first quarter of 2003. A distribution of approximately
$0.12 per Unit related to the assignment of this mortgage was declared in
February 2003 and is expected to be paid to Unitholders in May 2003.
As of March 1, 2003, all of the fully insured FHA-Insured Loans were
current with respect to the payment of principal and interest, except for the
mortgage on Town Park Apartments, which is delinquent with respect to the
February 2003 payment of principal and interest, as discussed further below.
In addition to base interest payments under Originated Insured Mortgages
FHA-Insured Loans, the Partnership is entitled to additional interest
Participations. During the years ended December 31, 2002, 2001 and 2000, the
Partnership received $8,396, $53,424, and $21,566, respectively, from the
Participations. These amounts are included in mortgage investment income on the
accompanying statements of income and comprehensive income.
The Section 221 Program
-----------------------
a. Issuance of Debenture
---------------------
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 mortgage on Baypoint Shoreline Apartments was
beneficially owned 50% by the Partnership and 50% by AIM 84. 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 prior to its maturity date. A distribution will be declared at that time.
Since the mortgage on Baypoint Shoreline Apartments was owned 50% by the
Partnership and 50% by AIM 84, approximately $906,000 of the debenture face is
due to AIM 84. In February 2003, the Partnership received approximately $59,000
in cash of accrued interest on this debenture. Approximately $29,000 of this
accrued interest was transferred to AIM 84 and the remaining amount will be
distributed through regular cash flow distributions. The Partnership expects to
recognize a gain of approximately $131,000 during the first quarter of 2003. The
servicer of this mortgage filed an application for insurance benefits under the
Section 221 Program in June 2002.
b. Mortgages in the HUD assignment process
---------------------------------------
The mortgages on Brougham Estates and College Green Apartments were put to
HUD under the Section 221 Program by the respective servicers in February 2003.
The aggregate face value of these mortgages was approximately $3.7 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 earns
semi-annual interest on debentures issued by HUD, as discussed above. The
Partnership has not received approval for these assignments as of March 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.
c. Remaining mortgages eligible for assignment
-------------------------------------------
The Partnership's mortgage portfolio includes two FHA-Insured Loans
eligible under the Section 221 Program with anniversary dates in September and
October 2002, including Kaynorth Apartments and Town Park Apartments. The
Partnership expects these mortgages to be put to HUD, if not otherwise disposed,
by the servicer during the second quarter of 2003.
44
7. INVESTMENT IN FHA DEBENTURE
The mortgage on Fox Run Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 84. A 7.125% debenture, with a face value of
approximately $2.4 million, was issued by HUD to the Partnership in December
2000 with interest payable semi-annually on January 1 and July 1. In January
2002, the debenture was liquidated at par value. Since the mortgage on Fox Run
Apartments was owned 50% by the Partnership and 50% by AIM 84, approximately
$1.2 million of the debenture proceeds were paid to AIM 84, including interest
of approximately $42,000. A distribution of approximately $0.09 per Unit related
to the redemption of this debenture was declared in January 2002 and paid to
Unitholders in May 2002.
8. TRANSACTIONS WITH RELATED PARTIES
The principal executive officers of the General Partner did not receive
fees for serving as executive officers of the General Partner during the years
ended December 31, 2002, 2001 and 2000, nor are any fees expected to be paid to
the executive officers in the future.
The General Partner, CMSLP and certain affiliated entities have, during the
years ended December 31, 2002, 2001 and 2000, earned or received compensation or
payments for services from the Partnership as follows:
COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
For the year ended December 31,
Name of Recipient Capacity in Which Served/Item 2002 2001 2000
- ----------------- ----------------------------- ---- ---- ----
CRIIMI, Inc.(1) General Partner/Distribution $1,350,555 $ 936,319 $ 789,254
AIM Acquisition Partners, L.P.(2) Advisor/Asset Management Fee 744,733 959,934 1,142,121
CRIIMI MAE Management, Inc.(3) Affiliate of General Partner/Expense 55,487 44,951 42,074
(1) The General Partner 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 from mortgage
prepayments, sales or insurance (both as defined in the Partnership
Agreement).
(2) The Advisor 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 fees equal to $219,496, $282,943, and $336,565 during the years
ended December 31, 2002, 2001, and 2000, 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.
45
9. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis during
the years ended December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
---- ---- ----
Quarter ended March 31 $ 1.325(1) $ 0.68(5) $ 0.47(8)
Quarter ended June 30 0.210(2) 0.37(6) 0.46(9)
Quarter ended September 30 0.410(3) 0.71(7) 0.18
Quarter ended December 31 0.810(4) 0.15 0.50(10)
-------- -------- --------
$ 2.755 $ 1.91 $ 1.61
======== ======== ========
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, 2002:
The Gate House Apartments Dec 2001 Prepayment $ 0.220
Longleaf Lodge Jan 2002 Prepayment 0.290
Fox Run Apartments Jan 2002 Assignment 0.090
Interest on debentures related to the mortgages on Summit Square
Manor, Park Place, Park Hill Apartments, Fairfax House, Woodland
Villas, Country Club Terrace Apartments, Dunhaven Apartments and Jan-Feb
Nevada Hill Apartments 2002 Assignment 0.060
Summit Square Manor Jan 2002 Assignment 0.150
Park Place Jan 2002 Assignment 0.060
Park Hill Apartments Jan 2002 Assignment 0.140
Fairfax House Jan 2002 Assignment 0.170
Woodland Villas Jan 2002 Assignment 0.025
(2) Quarter ended June 30, 2002:
Garden Court Apartments Apr 2002 Prepayment 0.090
(3) Quarter ended September 30, 2002:
Interest on debenture related to the mortgage on Fairlawn II Jul 2002 Assignment 0.010
Country Club Terrace Apartments Jul 2002 Assignment 0.120
Nevada Hill Apartments Jul 2002 Assignment 0.090
Dunhaven Apartments Jul 2002 Assignment 0.070
(4) Quarter ended December 31, 2002:
Franklin Plaza Sep 2002 Prepayment 0.400
Rock Glen Apartments Oct 2002 Prepayment 0.080
Highland Oaks Apartments Nov 2002 Prepayment 0.070
Bay Pointe Apartments Dec 2002 Prepayment 0.150
(5) Quarter ended March 31, 2001:
The Meadows of Livonia Jan 2001 Prepayment 0.530
(6) Quarter ended June 30, 2001:
Gold Key Village Apartments Mar 2001 Prepayment 0.220
(7) Quarter ended September 30, 2001:
Cedar Ridge Apartments Jun 2001 Prepayment 0.210
Carlisle Apartments Jun 2001 Prepayment 0.170
Afton Square Apartments Jul 2001 Prepayment 0.080
Berryhill Apartments Sep 2001 Prepayment 0.100
(8) Quarter ended March 31, 2000:
Northwood Apartments Dec 1999 Prepayment 0.130
Turtle Creek Apartments Jan 2000 Prepayment 0.130
(9) Quarter ended June 30, 2000
Woodland Hills Apartments Apr 2000 Prepayment 0.060
New Castle Apartments May 2000 Prepayment 0.160
Colony West Apartments May 2000 Prepayment 0.050
(10) Quarter ended December 31, 2000
Independence Park Oct 2000 Prepayment 0.320
46
The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although the
Partnership's Insured Mortgages pay a fixed monthly mortgage 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 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 debentures, the interest rate on 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.
10. PARTNERS' EQUITY
Depositary Units representing economic rights in limited partnership
interests ("Units") were issued at a stated value of $20. A total of 12,079,389
Units were issued prior to February 1986 for an aggregate capital contribution
of $241,587,780. In addition, the initial limited partner contributed $2,500 to
the capital of the Partnership and received 125 Units in exchange therefor.
47
11. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 2002, 2001 and 2000.
(In Thousands, Except Per Unit Data)
2002
Quarter ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Income $ 1,727 $ 1,668 $ 1,591 $ 1,457
Net gains from
mortgage dispositions 1,169 9 87 586
Net earnings 2,607 1,361 1,390 1,780
Net earnings per Limited
Partnership Unit - Basic 0.21 0.11 0.11 0.14
2001
Quarter ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Income $ 2,295 $ 2,216 $ 2,044 $ 1,971
Net gains from
mortgage dispositions 262 723 219 581
Net earnings 2,196 2,599 1,940 2,234
Net earnings per Limited
Partnership Unit - Basic 0.17 0.21 0.15 0.18
2000
Quarter ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Income $ 2,676 $ 2,553 $ 2,330 $ 2,420
Net gains from
mortgage dispositions 44 235 -- 149
Net earnings 2,320 2,396 1,948 2,202
Net earnings per Limited
Partnership Unit - Basic 0.18 0.19 0.15 0.19
48
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 2002
Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date(1) (7) Mortgage(5) (5)(13)(15) Interest)(11)(12)
- ------------------------- ---- ------- --- ----------- ----------- -----------------
ACQUIRED INSURED MORTGAGES
FHA-Insured Certificates (carried at fair value)
- ------------------------------------------------
The Executive House, Dayton, OH (2) 8/21 12/01 7.5% $ 789,370 $ 790,997 $ 78,855 (6)
Willow Dayton, Chicago, IL 8/19 N/A 7.5% 942,585 944,884 99,489 (6)
Steeplechase Apts., Aiken, SC 9/18 N/A 7.5% 465,876 467,158 50,921 (8)
Ashley Oaks Apts., Carrollton, GA 3/22 4/02 7.5% 530,877 531,862 52,292 (9)
Magnolia Place Apts., Franklin, TN 5/20 4/02 7.5% 298,329 299,000 30,804 (9)
Rainbow Terrace Apts., Milwaukee, WI 7/22 4/02 7.5% 302,621 303,164 29,581 (9)
Stonebridge Apts., Phase I, Montgomery, AL 4/20 4/02 7.5% 957,744 959,918 99,125 (9)
Village Knoll Apts., Harrisburg, PA 4/20 4/02 7.5% 994,368 996,625 102,914 (9)
Executive Tower, Toledo, OH 3/27 N/A 8.75% 2,760,693 2,885,906 275,283
Sangnok Villa, Los Angeles, CA 1/30 N/A 10.25% 884,589 906,853 96,825
Eaglewood Villa Apts., Springfield, OH 2/27 N/A 8.875% 2,628,001 2,747,140 264,707
Stafford Towers, Baltimore, MD 8/16 N/A 9.50% 320,527 321,485 42,613
Northwood Place, Meridian, MS 6/34 N/A 8.75% 4,411,013 4,608,726 412,635
Cheswick Apts., Indianapolis, IN 9/27 N/A 8.75% 2,986,344 3,121,614 295,736
Bradley Road Nursing, Bay Village, OH 5/34 N/A 8.875% 2,468,423 2,579,038 233,708
Heritage Heights Apts., Harrison, AR 4/32 N/A 9.50% 407,566 407,719 41,313
Pleasant View Nursing Home, Union, NJ 6/29 N/A 7.75% 7,222,207 7,228,188 643,311
------------ ------------
Total FHA-Insured Certificates -
Acquired Insured Mortgages, carried at fair value $ 29,371,133 $ 30,100,277
------------ ------------
GNMA Mortgage-Backed Securities (carried at fair value)
- -------------------------------------------------------
Pine Tree Lodge, Pasadena, TX 12/33 N/A 9.50% $ 1,985,491 $ 2,027,043 $ 194,399
Stone Hedge Village Apts., Farmington, NY 11/27 N/A 7.00% 1,719,825 1,721,769 143,481
------------ ------------
Total GNMA Mortgage-Backed Securities -
Acquired Insured Mortgages, carried at fair value $ 3,705,316 $ 3,748,812
------------ ------------
Total investment in Acquired Insured Mortgages, carried at fair value $ 33,076,449 $ 33,849,089
------------ ------------
ORIGINATED INSURED MORTGAGES
GNMA Mortgage-Backed Security (carried at fair value)
- -----------------------------------------------------
Oak Forest Apts. II, Ocoee, FL 12/31 11/09(3) 8.25% $ 10,220,413 $ 10,227,794 840,860
FHA-Insured Certificate (carried at fair value)
Waterford Green Apts., South St. Paul, MN 11/30 12/04(3) 7.25%(11) 5,753,915 5,758,501 481,564
------------ ------------
Total investment in Originated Insured Mortgages, carried at fair value $ 15,974,328 $ 15,986,295
------------ ------------
Total investment in FHA-Insured Certificates and
GNMA Mortgage-Backed Securities, carried at fair value $ 49,050,777 $ 49,835,384
------------ ------------
49
Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date(1) (7) Mortgage(5) (5)(13)(15) Interest)(11)(12)
- ------------------------- ---- ------- --- ----------- ----------- -----------------
ACQUIRED INSURED MORTGAGES
FHA-Insured Loans (carried at amortized cost) (4)
- ---------------------------------------------
Baypoint Shoreline Apts., Duluth, MN (15) 1/22 10/01 7.50% $ 889,548 $ 750,546 $ 87,967(10)
Brougham Estates II, Kansas City, KS (2) 11/22 3/02 7.50% 2,379,451 2,000,171 230,860(10)
College Green Apts., Wilmington, NC (2) 3/23 12/02 7.50% 1,281,638 1,076,156 123,455(10)
Kaynorth Apts., Lansing, MI 4/23 9/02 7.50% 1,740,061 1,460,448 167,318(10)
Town Park Apts., Rockingham, NC 10/22 10/02 7.50% 583,386 491,001 56,755(10)
Westbrook Apts., Kokomo, IN (15) 11/22 9/02 7.50% 1,645,678 1,397,952 163,177(10)
------------ ------------
Total investment in Acquired Insured Mortgages,
FHA-Insured Loans, carried at amortized cost $ 8,519,762 $ 7,176,274
------------ ------------
ORIGINATED INSURED MORTGAGES
FHA-Insured Loans (carried at amortized cost) (4)
- ---------------------------------------------
Cobblestone Apts., Fayetteville, NC 3/28 12/02(3) 8.50%(11) $ 4,797,712 $ 4,922,623 $ 462,703
The Plantation, Greenville, NC 4/28 4/03(3) 8.25%(11) 4,262,022 4,389,284 402,046
------------ ------------ ------------
Total investment in Originated Insured Mortgages,
FHA-Insured Loans, carried at amortized cost $ 9,059,734 $ 9,311,907
------------ ------------
Total investment in FHA-Insured Loans, carried at amortized cost $ 17,579,496 $ 16,488,181
------------ ------------
TOTAL INVESTMENT IN INSURED MORTGAGES $ 66,630,273 $ 66,323,565
============ ============
TOTAL ANNUAL PRINCIPAL AND INTEREST $ 6,204,697
============
50
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2002
(1) Certain Insured Mortgages held by the Partnership are eligible for
assignment to HUD under the Section 221(g)(4) program of the National
Housing Act (the "Section 221 Program.") A mortgagee has the right to
assign a mortgage ("put") to the United States Department of Housing and
Urban Development ("HUD") at the expiration of 20 years from the date of
final endorsement ("Anniversary Date") if the mortgage is not in default at
such time. The mortgagee may exercise its option to put the mortgage to HUD
during the one year period subsequent to the Anniversary Date. This
assignment procedure is applicable to an Insured Mortgage, which had a firm
or conditional commitment for HUD insurance benefits on or before November
30, 1983. Any mortgagee electing to assign an Insured Mortgage to HUD
receives, in exchange therefor, debentures having a total face value equal
to (i) the then outstanding principal balance of the Insured Mortgage (ii)
plus accrued interest on the mortgage to the date of assignment ("Debenture
Issuance Date"). These debentures generally mature 10 years from the date
of assignment and bear interest at a rate announced semi-annually by HUD in
the Federal Register ("going Federal rate") at such date. Generally, the
Partnership is not the named mortgagee for the FHA-Insured Certificates. In
this case, the HUD debentures are generally issued to an unrelated third
party that is the named mortgagee. The servicer of the applicable mortgage
is responsible for delivering to the Partnership all HUD insurance claim
proceeds. The debenture interest is paid to the Partnership in the month it
is received by the servicer. The debenture proceeds are paid to the
Partnership in the month the debenture is redeemed by HUD or sold by the
servicer. Based on the recommendation of CMSLP, the sub-advisor, and
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.
(2) An application for insurance benefits under the Section 221 program has
been filed for this mortgage. The Partnership is currently awaiting
approval from HUD for this application.
(3) Certain mortgages that do not qualify under the Section 221 program contain
a special assignment option, in certain Insured Mortgage documents, which
allow the Partnership, anytime after this date, the option to require
payment from the borrower of the unpaid principal balance of the Insured
Mortgages. Upon such request from the Partnership, the borrowers must make
payment to the Partnership, or the Partnership, at its option, may cancel
the FHA insurance and institute foreclosure proceedings.
(4) Inclusive of closing costs and acquisition fees.
(5) The mortgages underlying the Partnership's investments in FHA-Insured
Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are
primarily non-recourse first liens on multifamily residential developments
and retirement homes. Prepayment of these Insured Mortgages would be based
upon the unpaid principal balance at the time of prepayment.
(6) In April and July 1985, and February 1986, the Partnership purchased
pass-through certificates representing undivided fractional interests of
157/537, 69/537 and 259/537, respectively, in a pool of 19 FHA-Insured
Mortgages. In July 1986 and October 1987, the Partnership sold undivided
fractional interests of 67/537 and 40/537, respectively, in this pool.
Accordingly, the Partnership now owns an undivided fractional interest
aggregating 378/537, or approximately 70.4%, in this pool. For purposes of
illustration only, the amounts shown in this table represent the
Partnership's current share of these items as if an undivided interest in
each mortgage was acquired.
(7) In addition, the servicer or the sub-servicer of the Insured Mortgage,
primarily unaffiliated third parties, is entitled to receive compensation
for certain services rendered.
51
(8) In June 1985 and February 1986, the Partnership purchased pass-through
certificates representing undivided fractional interests of 317/392 and
11/392, respectively, in a pool of 13 FHA-Insured Mortgages. In January and
February 1988, the Partnership sold undivided fractional interests of
100/392 and 104/392, respectively, in this pool. Accordingly, the
Partnership now owns an undivided fractional interest aggregating 124/392,
or approximately 31.6%, in this pool. For purposes of illustration only,
the amounts shown in this table represent the Partnership's share of these
items as if an undivided interest in each mortgage was acquired.
(9) In June 1985 and February 1986, the Partnership purchased pass-through
certificates representing undivided fractional interests of 200/341 and
101/341, respectively, in a pool of 12 FHA-Insured Mortgages. In October
1987, the Partnership sold undivided fractional interests of 200/341 in
this pool. Accordingly, the Partnership now owns an undivided fractional
interest aggregating 101/341, or approximately 29.6%, in this pool. For
purposes of illustration only, the amounts shown in this table represent
the Partnership's share of these items as if an undivided interest in each
mortgage was acquired.
(10) These amounts represent the Partnership's 50% interest in these mortgages.
The remaining 50% interest was acquired by American Insured Mortgage
Investors, an affiliate of the Partnership.
(11) This represents the base interest rate during the permanent phase of these
Insured Mortgages. Additional interest (referred to as "Participations")
measured as a percentage of the net cash flow from the development and the
net proceeds from the sale, refinancing or other disposition of the
underlying development (as defined in the Participation Agreements), will
also be due. During the years ended December 31, 2002, 2001 and 2000, the
Partnership received additional interest of $8,396, $53,424, and $21,566,
respectively, from the Participations.
(12) Principal and interest are payable at level amounts over the life of the
mortgages.
(13) A reconciliation of the carrying value of Insured Mortgages for the years
ended December 31, 2002 and 2001, is as follows:
2002 2001
---- ----
Beginning balance $ 82,924,257 $109,309,175
Principal receipts on mortgages (769,593) (955,959)
Proceeds from mortgage prepayments (14,111,131) (19,316,901)
Proceeds from mortgage assignments (3,431,297) -
Net gains on mortgage dispositions
1,851,251 1,785,376
Portion of 7.125% - 7.5% debentures due from a third party
in exchange for the mortgages on Summit Square Manor,
Park Place, Park Hill Apartments, Fairfax House,
Woodland Villas and Fairlawn II (744,159) (6,759,242)
Increase (decrease) to unrealized gains on
Investments in Insured Mortgages 604,237 (1,138,192)
------------ ------------
Ending balance $ 66,323,565 $ 82,924,257
============ ============
(14) As of December 31, 2002 and 2001, the tax basis of the Insured Mortgages
was approximately $65.1 million and $80.7 million, respectively.
(15) The Partnership received HUD assignment proceeds for these mortgages
subsequent to December 31, 2002. Detail information is included in Note 6
of the Notes to Financial Statements.