1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
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Commission file number 1-11059
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
-----------------------------------------------------
(Exact name of registrant as specified in charter)
California 13-3257662
- -------------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of September 30, 2003, 12,079,514 depositary units of limited
partnership interest were outstanding.
2
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Page
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PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 2003 (unaudited) and
December 31, 2002 3
Statements of Income and Comprehensive Income -
for the three and nine months ended September 30,
2003 and 2002 (unaudited) 4
Statement of Changes in Partners' Equity - for the
nine months ended September 30, 2003 (unaudited) 5
Statements of Cash Flows - for the nine months ended
September 30, 2003 and 2002 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures about
Market Risk 17
Item 4. Controls and Procedures 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
BALANCE SHEETS
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Investment in FHA-Insured Certificates and GNMA
Mortgage-Backed Securities, at fair value
Acquired insured mortgages $ 30,187,602 $ 33,849,089
Originated insured mortgages 15,954,586 15,986,295
------------ ------------
46,142,188 49,835,384
Investment in FHA-Insured Loans, at amortized cost,
net of unamortized discount and premium:
Acquired insured mortgages 1,442,836 7,176,274
Originated insured mortgages 9,222,443 9,311,907
------------ ------------
10,665,279 16,488,181
Investment in debentures, at fair value 10,335,670 -
Cash and cash equivalents 1,807,560 10,448,516
Receivables and other assets 1,662,494 1,465,453
------------ ------------
Total assets $ 70,613,191 $ 78,237,534
============ ============
LIABILITIES AND PARTNERS' EQUITY
Distributions payable $ 1,634,066 $ 10,181,484
Accounts payable and accrued expenses 127,663 115,799
Due to affiliate 5,409,105 -
------------ ------------
Total liabilities 7,170,834 10,297,283
------------ ------------
Partners' equity:
Limited partners' equity, 15,000,000 Units authorized,
12,079,514 Units issued and outstanding 69,274,899 73,382,252
General partner's deficit (7,019,986) (6,853,298)
Accumulated other comprehensive income 1,187,444 1,411,297
------------ ------------
Total partners' equity 63,442,357 67,940,251
------------ ------------
Total liabilities and partners' equity $ 70,613,191 $ 78,237,534
============ ============
The accompanying notes are an integral part
of these financial statements.
4
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Income:
Mortgage investment income $ 1,161,982 $ 1,556,263 $ 3,745,842 $ 4,756,219
Interest and other income 77,349 34,691 141,231 228,977
----------- ----------- ----------- -----------
1,239,331 1,590,954 3,887,073 4,985,196
----------- ----------- ----------- -----------
Expenses:
Asset management fee to related parties 148,703 189,662 469,277 571,168
General and administrative 106,163 98,586 329,205 320,922
----------- ----------- ----------- -----------
254,866 288,248 798,482 892,090
----------- ----------- ----------- -----------
Net earnings before gains on
mortgage dispositions 984,465 1,302,706 3,088,591 4,093,106
Gains on mortgage dispositions 627,469 86,839 1,373,339 1,264,766
----------- ----------- ----------- -----------
Net earnings $ 1,611,934 $ 1,389,545 $ 4,461,930 $ 5,357,872
=========== =========== =========== ===========
Other comprehensive income (loss) - adjustment to
unrealized gains and losses on investments in
insured mortgages 244,552 (222,429) (223,853) 584,702
----------- ----------- ----------- -----------
Comprehensive income $ 1,856,486 $ 1,167,116 $ 4,238,077 $ 5,942,574
=========== =========== =========== ===========
Net earnings allocated to:
Limited partners - 96.1% $ 1,549,069 $ 1,335,353 $ 4,287,915 $ 5,148,915
General Partner - 3.9% 62,865 54,192 174,015 208,957
----------- ----------- ----------- -----------
$ 1,611,934 $ 1,389,545 $ 4,461,930 $ 5,357,872
=========== =========== =========== ===========
Net earnings per Unit of limited
partnership interest - basic $ 0.13 $ 0.11 $ 0.35 $ 0.43
=========== =========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
For the nine months ended September 30, 2003
(Unaudited)
Accumulated
Other
General Limited Comprehensive
Partner Partners Income Total
------------ ----------- ------------- -----------
Balance, December 31, 2002 $ (6,853,298) $ 73,382,252 $ 1,411,297 $ 67,940,251
Net earnings 174,015 4,287,915 - 4,461,930
Adjustment to unrealized gains and losses on
investments in insured mortgages - - (223,853) (223,853)
Distributions paid or accrued of $0.695 per Unit,
including return of capital of $0.345 per Unit (340,703) (8,395,268) - (8,735,971)
------------ ------------ ----------- ------------
Balance, September 30, 2003 $ (7,019,986) $ 69,274,899 $ 1,187,444 $ 63,442,357
============ ============ =========== ============
Limited Partnership Units outstanding - basic, as
of September 30, 2003 12,079,514
==========
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
2003 2002
----------- ------------
Cash flows from operating activities:
Net earnings $ 4,461,930 $ 5,357,872
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gains on mortgage dispositions (1,373,339) (1,264,766)
Changes in assets and liabilities:
Net decrease in receivables and other assets 37,306 976,412
Increase in accounts payables and accrued expenses 11,864 8,054
Increase (decrease) in due to affiliate 91,704 (42,487)
----------- -----------
Net cash provided by operating activities 3,229,465 5,035,085
----------- -----------
Cash flows from investing activities:
Proceeds from mortgage prepayments 2,674,487 9,863,187
Proceeds from mortgage assignments 1,528,983 10,190,539
Proceeds from redemption of debenture 744,159 2,385,233
Debenture proceeds paid to affiliate - (1,192,617)
Receipt of mortgage principal from scheduled payments 465,339 575,047
----------- -----------
Net cash provided by investing activities 5,412,968 21,821,389
----------- -----------
Cash flows used in financing activities:
Distributions paid to partners (17,283,389) (21,180,004)
----------- -----------
Net (decrease) increase in cash and cash equivalents (8,640,956) 5,676,470
Cash and cash equivalents, beginning of period 10,448,516 4,366,085
----------- -----------
Cash and cash equivalents, end of period $ 1,807,560 $10,042,555
=========== ===========
Non-cash investing activity:
Portion of 7.5% debenture due from a third party
in exchange for the mortgage on Fairlawn II $ - $ 744,159
Portion of 6.375% debenture due from a third party in exchange
for the mortgage on The Executive House 810,660 -
Debentures received from HUD in exchange for assigned mortgages 10,335,670 -
Portion of debentures due to affiliate (5,167,835) -
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
American Insured Mortgage Investors - Series 85, L.P. (the "Partnership")
was formed pursuant to a limited partnership agreement, as amended,
("Partnership Agreement") under the Uniform Limited Partnership Act of the state
of California on June 26, 1984. During the period from March 8, 1985 (the
initial closing date of the Partnership's public offering) through January 27,
1986 (the termination date of the offering), the Partnership, pursuant to its
public offering of 12,079,389 Depository Units of limited partnership interest
("Units") raised a total of $241,587,780 in gross proceeds. In addition, the
initial limited partner contributed $2,500 to the capital of the Partnership in
exchange for 125 units of limited partnership interest.
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
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the provisions thereof. The Partnership is required, pursuant to the
Partnership Agreement, to dispose of its assets prior to this date.
2. BASIS OF PRESENTATION
The Partnership's financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of the General Partner, the accompanying unaudited financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Partnership as of September 30,
2003, the results of its operations for the three and nine months ended
September 30, 2003 and 2002, and its cash flows for the nine months ended
September 30, 2003 and 2002.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with GAAP have been condensed or omitted.
While the General Partner believes that the disclosures presented are adequate
to make the information not misleading, these financial statements should be
read in conjunction with the financial statements and the notes to the financial
statements included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 2002.
3. INVESTMENT IN GNMA MORTGAGE-BACKED SECURITIES AND FHA-INSURED CERTIFICATES
Listed below is the Partnership's aggregate investment in GNMA
Mortgage-Backed Securities and FHA-Insured Certificates:
September 30, December 31,
2003 2002
------------ ------------
Acquired Mortgages:
Number of:
GNMA Mortgage-Backed Securities 2 2
FHA-Insured Certificates (1) through (5) 12 17
Amortized Cost $29,106,992 $32,449,759
Face Value 29,300,978 33,076,449
Fair Value 30,187,602 33,849,089
Originated Mortgages:
Number of:
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $15,847,752 $15,974,329
Face Value 15,847,750 15,974,328
Fair Value 15,954,586 15,986,295
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(1) In March 2003, the mortgage on Stonebridge Apartments was prepaid. The
Partnership received net proceeds of approximately $950,000 and recognized
a gain of approximately $93,000 during the nine months ended September 30,
2003. A distribution of approximately $0.075 per Unit related to the
prepayment of this mortgage was declared in April and paid to Unitholders
in August 2003.
(2) In May 2003, the mortgage on Willow Dayton was prepaid. The Partnership
received net proceeds of approximately $929,000 and recognized a gain of
approximately $107,000 during the nine months ended September 30, 2003. A
distribution of approximately $0.07 per Unit related to the prepayment of
this mortgage was declared in June and paid to Unitholders in August 2003.
(3) In May 2003, the mortgage on Magnolia Place Apartments was prepaid. The
Partnership received net proceeds of approximately $295,000 and recognized
a gain of approximately $29,000 during the nine months ended September 30,
2003. A distribution of approximately $0.02 per Unit related to the
prepayment of this mortgage was declared in June and paid to Unitholders in
August 2003.
(4) In May 2003, HUD issued assignment proceeds in the form of a 6.375%
debenture in exchange for the mortgage on The Executive House. Since the
mortgage on The Executive House was beneficially owned 70.39% by the
Partnership and the remainder by unrelated third parties, the debenture is
held by an unrelated third party and the face amount due to the Partnership
is included in Receivables and other assets on the Partnership's balance
sheet. See further discussion in Note 5.
(5) In June 2003, the mortgage on Ashley Oaks Apartments was prepaid. The
Partnership received net proceeds of approximately $525,000 and recognized
a gain of approximately $60,000 during the nine months ended September 30,
2003. A distribution of approximately $0.04 per Unit related to the
prepayment of this mortgage was declared in July and paid to Unitholders in
November 2003.
As of November 1, 2003, all of the GNMA Mortgage-Backed Securities and
FHA-Insured Certificates are current with respect to the payment of principal
and interest.
4. INVESTMENT IN FHA-INSURED LOANS
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:
September 30, December 31,
2003 2002
------------ ------------
Acquired Loans:
Number of Loans (1) through (5) 1 6
Amortized Cost $ 1,442,836 $ 7,176,274
Face Value 1,711,751 8,519,762
Fair Value 1,714,975 8,513,052
Originated Loans:
Number of Loans 2 2
Amortized Cost $ 9,222,443 $ 9,311,907
Face Value 8,978,496 9,059,734
Fair Value 9,437,102 9,470,182
(1) In January 2003, the Partnership received assignment proceeds from HUD for
the mortgage on Westbrook Apartments. The servicer of this mortgage filed a
Notice of Election to Assign in November 2002 as a result of principal and
interest payments being over 60 days delinquent. The Partnership received
net proceeds of approximately $1.5 million, which included 90% of the
unpaid principal balance of this mortgage, plus interest at the debenture
rate of 9.875% from September 2002 through January 2003. The Partnership
recognized a gain of approximately $228,000 during the nine months ended
September 30, 2003. A distribution of approximately $0.12 per Unit related
to the assignment of this mortgage was declared in February 2003 and was
paid to Unitholders in May 2003. As of November 1, 2003, the Partnership
has received the remaining amount due of approximately $330,000, which
includes the remaining principal balance plus accrued interest. The
Partnership has paid the amount due to AIM 84 for its 50% portion of this
amount (approximately $165,000) and expects to announce a distribution in
November 2003 for the net amount received of $165,000.
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(2) In February 2003, HUD transferred assignment proceeds to the Partnership in
the form of a 6.375% debenture, with a face value of approximately $1.8
million, in exchange for the mortgage on Baypoint Shoreline Apartments.
Since the mortgage on Baypoint Shoreline Apartments was beneficially owned
50% by the Partnership and 50% by AIM 84, approximately $906,000 of the
debenture face is due to AIM 84. See further discussion in Note 5.
(3) In July 2003, HUD transferred assignment proceeds to the Partnership in the
form of a 5.75% debenture, with a face value of approximately $2.6 million,
in exchange for the mortgage on College Green Apartments. Since the
mortgage on College Green Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 84, approximately $1.3 million of the debenture
face is due to AIM 84. See further discussion in Note 5.
(4) In August 2003, HUD transferred assignment proceeds to the Partnership in
the form of a 5.75% debenture, with a face value of approximately $4.8
million, in exchange for the mortgage on Brougham Estates II. Since the
mortgage on Brougham Estates II was beneficially owned 50% by the
Partnership and 50% by AIM 84, approximately $2.4 million of the debenture
face is due to AIM 84. See further discussion in Note 5.
(5) In August 2003, HUD transferred assignment proceeds to the Partnership in
the form of a 5.75% debenture, with a face value of approximately $1.2
million, in exchange for the mortgage on Town Park Apartments. Since the
mortgage on Town Park Apartments was beneficially owned 50% by the
Partnership and 50% by AIM 84, approximately $589,000 of the debenture face
is due to AIM 84. See further discussion in Note 5.
As of November 1, 2003, all of the Partnership's FHA-Insured Loans were
current with respect to the payment of principal and interest.
In addition to base interest payments under Originated Insured Mortgages,
the Partnership is entitled to additional interest based on a percentage of the
net cash flow from the underlying development (referred to as "Participations").
During the three and nine months ended September 30, 2003, the Partnership did
not receive additional interest from the Participations. During the three and
nine months ended September 30, 2002, the Partnership received additional
interest of $0 and $8,396, respectively, from the Participations. These amounts,
if any, are included in mortgage investment income on the accompanying
Statements of Income and Comprehensive Income.
The Section 221 Program
-----------------------
As of November 1, 2003, there is only one Insured Mortgage held by the
Partnership, as discussed below, which has been assigned to HUD under the
Section 221(g)(4) program of the National Housing Act (the "Section 221
Program.") A mortgagee has the right to assign a mortgage ("put") to the United
States Department of Housing and Urban Development ("HUD") at the expiration of
20 years from the date of final endorsement ("Anniversary Date") if the mortgage
is not in default at such time. The mortgagee may exercise its option to put the
mortgage to HUD during the one year period subsequent to the Anniversary Date.
This assignment procedure is applicable to an Insured Mortgage, which had a firm
or conditional commitment for HUD insurance benefits on or before November 30,
1983. Any mortgagee electing to assign an Insured Mortgage to HUD receives, in
exchange therefor, a debenture 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"). The
debenture generally matures 10 years from the date of assignment and bears
interest at a rate announced semi-annually by HUD in the Federal Register
("going Federal rate") at such date. In some cases, the Partnership is not the
named mortgagee for the FHA-Insured Certificate. In this case, the debenture is
generally issued to an unrelated third party that is the named mortgagee. The
servicer of the applicable mortgage is responsible for delivering to the
Partnership all HUD insurance claim proceeds. The debenture interest is paid to
the Partnership in the month it is received by the servicer. The debenture
proceeds are paid to the Partnership in the month the debenture is redeemed by
HUD, sold by the servicer or sold by the General Partner. Debentures sold by the
General Partner are based on the recommendation of CMSLP, the sub-advisor, and
the consent of the Advisor, based upon, in general, but not limited to, the
interest rates on debentures issued by HUD and the costs and risks associated
with continuing to hold the debentures.
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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) a debenture, as discussed above, (ii) plus cash for accrued
interest on the debenture at the going Federal rate, from the Debenture Issuance
Date to the most current interest payment date. Thereafter, the mortgagee
receives interest on the debenture 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, 2003 was 5.75%. The
Partnership will recognize a gain on a mortgage assignment at the time it
receives notification that the assignment has been approved. HUD assignment
approval generally occurs when HUD transfers the debenture to the mortgagee
and/or when the Partnership receives cash for the accrued interest on the
debenture. 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.
Mortgage in the Section 221 HUD assignment process
--------------------------------------------------
In April 2003, the servicer of the mortgage on Kaynorth Apartments filed an
application to put this mortgage to HUD under the Section 221 Program. The face
value of this mortgage was approximately $1.7 million as of the application
date. The Partnership no longer receives monthly principal and interest from a
mortgage that is put to HUD under the Section 221 Program. HUD receives the
monthly principal and interest and the Partnership earns semi-annual interest on
a debenture issued by HUD, as discussed above. The Partnership has not received
approval for this assignment as of November 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 amortized cost of this
mortgage is included in Investment in FHA-Insured Loans on the Partnership's
balance sheet as of September 30, 2003.
5. INVESTMENTS IN DEBENTURES AND DUE TO AFFILIATE
Listed below are debentures issued to the Partnership by HUD in exchange
for mortgages put to HUD under the Section 221 program. As indicated in the
table below, the Partnership's debentures have been called by HUD for redemption
on January 1, 2004. The Partnership expects to receive the face value, plus
accrued interest on the redemption date. The application date is the date the
servicer of the respective mortgage filed an application for insurance benefits
under the Section 221 Program. The receipt date is the date the Partnership
received the debenture and reported a gain related to the assignment of the
respective mortgage. The debentures pay interest semi-annually on January 1 and
July 1. Since the mortgages listed were beneficially owned 50% by the
Partnership and 50% by AIM 84, approximately $5.2 million of the debenture face
plus accrued interest is due to AIM 84 and is included in Due to affiliate on
the Partnership's balance sheet at September 30, 2003.
12
Net Amount Gain on
Redemption Interest Face Due to Due to the Application Receipt Assignment
Debenture for mortgage on: Date Rate Value Affiliate Partnership Date Date Of mortgage
- -------------------------- ----- ------ ------ ----------- ------------ ----- ----- -----------
Baypoint Shoreline
Apartments 01/01/2004 6.375% $ 1,812,914 $ 906,457 $ 906,457 Jun-02 Feb-03 $ 131,321
College Green Apartments 01/01/2004 5.750% 2,571,331 1,285,666 1,285,665 Feb-03 Jul-03 191,756
Brougham Estates II 01/01/2004 5.750% 4,773,594 2,386,797 2,386,797 Feb-03 Aug-03 349,286
Town Park Apartments 01/01/2004 5.750% 1,177,831 588,915 588,916 Feb-03 Aug-03 86,426
----------- ---------- ---------- ---------
Total debentures $10,335,670 $5,167,835 $5,167,835 $ 758,789
=========== ========== ========== =========
In May 2003, HUD issued assignment proceeds in the form of a 6.375%
debenture in exchange for the mortgage on The Executive House. The mortgage on
The Executive House was put to HUD under the Section 221 Program by the servicer
in April 2002. The debenture, with a face value due to the Partnership of
approximately $811,000, pays interest semi-annually on January 1 and July 1.
This debenture has been called by HUD for redemption on January 1, 2004, at face
amount plus accrued interest. A distribution will be declared after the
debenture proceeds are received by the Partnership. The Partnership recognized a
gain of approximately $97,000 during the nine months ended September 30, 2003.
Since the Partnership only owned 70.39% of the FHA insured certificate secured
by the mortgage on The Executive House and the remainder was held by unrelated
third parties, the debenture is held by an unrelated third party and the face
amount of approximately $811,000 due to the Partnership is included in
Receivables and other assets on the Partnership's balance sheet as of September
30, 2003.
Redemption of debenture
-----------------------
In January 2003, HUD redeemed the 7.5% debenture with a face amount of
approximately $758,000, issued in July 2002 in exchange for the mortgage on
Fairlawn II. A distribution of approximately $0.06 per Unit related to the
debenture proceeds was declared in February 2003 and was paid to Unitholders in
May 2003. The accrued interest of approximately $28,000 related to this
debenture was also received in January 2003 and is being distributed through
regular cash flow distributions. This amount was included in Receivables and
other Assets on the Partnership's balance sheet at December 31, 2002.
13
6. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for
the nine months ended September 30, 2003 and 2002 are as follows:
2003 2002
---- ----
Quarter ended March 31 $0.310 (1) $1.325 (4)
Quarter ended June 30 0.255 (2) 0.210 (5)
Quarter ended September 30 0.130 (3) 0.410 (6)
------ ------
$0.695 $1.945
====== ======
The following disposition proceeds are included in the distributions listed
above:
Date Net
Proceeds Type of Proceeds
Complex Name(s) Received Disposition Per Unit
--------------- ---------- ------------ --------
(1) Quarter ended March 31, 2003:
Walnut Hills Dec 2002 Prepayment $0.040
Westbrook Apartments Jan 2003 Assignment 0.120
Fairlawn II (redemption of 7.5% debenture) Jan 2003 Assignment 0.060
(2) Quarter ended June 30, 2003:
Stonebridge Apartments Mar 2003 Prepayment 0.075
Magnolia Place Apartments May 2003 Prepayment 0.020
Willow Dayton May 2003 Prepayment 0.070
(3) Quarter ended September 30, 2003:
Ashley Oaks Apartments Jun 2003 Prepayment 0.040
(4) Quarter ended March 31, 2002:
The Gate House Apartments Dec 2001 Prepayment 0.220
Longleaf Lodge Jan 2002 Prepayment 0.290
Fox Run Apartments (redemption of 7.125% debenture) Jan 2002 Assignment 0.090
Interest on debentures related to mortgages on Summit
Square Manor, Park Place, Park Hill Apts, Fairfax
House, Woodland Villas, Country Club Terrace Apts, Jan - Feb
Dunhaven Apts and Nevada Hills Apts 2002 Assignment 0.060
Summit Square Manor (redemption of 7.125% debenture) Jan 2002 Assignment 0.150
Park Place (redemption of 7.125% debenture) Jan 2002 Assignment 0.060
Park Hill Apartments (redemption of 7.5% debenture) Jan 2002 Assignment 0.140
Fairfax House (redemption of 7.5% debenture) Jan 2002 Assignment 0.170
Woodland Villas (redemption of 7.125% debenture) Jan 2002 Assignment 0.025
(5) Quarter ended June 30, 2002:
Garden Court Apartments Apr 2002 Prepayment 0.090
(6) Quarter ended September 30, 2002:
Interest on debenture related to mortgage on Fairlawn II Jul 2002 Assignment 0.010
Country Club Terrace Apartments Jul 2002 Assignment 0.120
Nevada Hills Apartments Jul 2002 Assignment 0.090
Dunhaven Apartments Jul 2002 Assignment 0.070
14
The basis for paying distributions to Unitholders is net proceeds from
mortgage and/or debenture dispositions, if any, and cash flow from operations,
which includes regular interest income and principal from Insured Mortgages and
interest on debentures. Although the Insured Mortgages pay a fixed monthly
mortgage payment and the debentures have a fixed semi-annual interest payment,
the cash distributions paid to the Unitholders will vary during each quarter due
to (1) the fluctuating yields in the short-term money market where the monthly
mortgage payments and debenture interest are temporarily invested prior to the
payment of quarterly distributions, (2) the reduction in the asset base and
monthly mortgage payments resulting from monthly mortgage payments received or
mortgage and debenture dispositions, (3) variations in the cash flow
attributable to the delinquency or default of Insured Mortgages and professional
fees and foreclosure costs incurred in connection with those Insured Mortgages
and (4) variations in the Partnership's operating expenses. As the Partnership
continues to liquidate its mortgage investments and Unitholders receive
distributions of return of capital and taxable gains, Unitholders should expect
a reduction in earnings and distributions due to the decreasing mortgage base.
See also the discussion of the redemption of debentures in January 2004 in Note
5. Upon the termination and liquidation of the Partnership, on or before
December 31, 2009, distributions to Unitholders will be made in accordance with
the terms of the Partnership Agreement, as amended. A final distribution to
Unitholders will be based on the Partnership's remaining net assets, and such
distribution to Unitholders is likely to be substantially less than the amount
referenced in limited partners' equity in the Partnership's financial
statements.
7. TRANSACTIONS WITH RELATED PARTIES
The General Partner and certain affiliated entities earned or received
compensation or payments for services from the Partnership as follows:
COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
-----------------------------------------------
For the For the
three months ended nine months ended
September 30, September 30,
Name of Recipient Capacity in Which Served/Item 2003 2002 2003 2002
----------------- ----------------------------- ----- ----- ----- ----
CRIIMI, Inc. (1) General Partner/Distribution $ 63,729 $ 200,990 $ 340,703 $ 953,477
AIM Acquisition Partners, L.P.(2) Advisor/Asset Management Fee 148,703 189,662 469,277 571,168
Affiliate of General Partner/Expense
CRIIMI MAE Management, Inc.(3) Reimbursement 14,831 9,763 45,801 39,697
(1) The General Partner, pursuant to the Partnership Agreement, is entitled to
receive 3.9% of the Partnership's income, loss, capital and distributions,
including, without limitation, the Partnership's adjusted cash from
operations and proceeds of mortgage prepayments, sales or insurance (as
defined in the Partnership Agreement).
(2) The Advisor, pursuant to the Partnership Agreement, is entitled to an Asset
Management Fee equal to 0.95% of Total Invested Assets (as defined in the
Partnership Agreement). CMSLP, pursuant to the Sub-Advisory Agreement, is
entitled to a fee of 0.28% of Total Invested Assets from the Advisor's
Asset Management Fee. Of the amounts paid to the Advisor, CMSLP earned a
fee equal to $43,823 and $138,300 for the three and nine months ended
September 30, 2003, respectively, and $55,896 and $168,344 for the three
and nine months ended September 30, 2002, respectively. The general partner
and limited partner of CMSLP are wholly owned subsidiaries of CRIIMI MAE.
(3) CRIIMI MAE Management, Inc., an affiliate of the General Partner, is
reimbursed for personnel and administrative services on an actual cost
basis.
15
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the
words "believe," "anticipate," "expect," "contemplate," "may," "will," and
similar expressions are intended to identify forward-looking statements.
Statements looking forward in time are included in this Quarterly Report on Form
10-Q pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially.
Accordingly, the following information contains or may contain forward-looking
statements: (1) information included or incorporated by reference in this
Quarterly Report on Form 10-Q, including, without limitation, statements made
under Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations, (2) information included or incorporated by reference in
prior and future filings by the Partnership with the Securities and Exchange
Commission ("SEC") including, without limitation, statements with respect to
growth, projected revenues, earnings, returns and yields on its portfolio of
mortgage assets, the impact of interest rates, costs and business strategies and
plans and (3) information contained in written material, releases and oral
statements issued by or on behalf of, the Partnership, including, without
limitation, statements with respect to growth, projected revenues, earnings,
returns and yields on its portfolio of mortgage assets, the impact of interest
rates, costs and business strategies and plans. Factors which may cause actual
results to differ materially from those contained in the forward-looking
statements identified above include, but are not limited to (i) regulatory and
litigation matters, (ii) interest rates, (iii) trends in the economy, (iv)
prepayment of mortgages, (v) defaulted mortgages, (vi) errors in servicing
defaulted mortgages and (vii) sales of mortgage investments below fair market
value. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only of the date hereof. The Partnership
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
Mortgage Investments
- --------------------
As of September 30, 2003, the Partnership had invested in 19 Insured
Mortgages and five debentures with an aggregate amortized cost of approximately
$61.6 million, an aggregate face value of approximately $61.8 million and an
aggregate fair value of approximately $63.3 million. During the third quarter of
2003, three mortgages were approved for assignment to HUD as discussed in
"Results of Operations."
The Partnership's five debentures, with an aggregate face value of
approximately $11.1 million have been called for redemption by HUD on January 1,
2004. Four of the debentures, with an aggregate face value of $10.3 million,
were issued in exchange for mortgages that were held jointly by AIM 84 and AIM
85, therefore 50% of the debenture proceeds are due to AIM 84.
As of November 1, 2003, all of the Insured Mortgages are current with
respect to the payment of principal and interest.
Results of Operations
- ---------------------
Net earnings increased by approximately $222,000 for the three months ended
September 30, 2003, as compared to the corresponding period in 2002, primarily
due to an increase in gains on mortgage dispositions partially offset by a
decrease in mortgage investment income. Net earnings decreased by approximately
$896,000 for the nine months ended September 30, 2003, as compared to the
corresponding period in 2002, primarily due to a decrease in mortgage investment
income partially offset by an increase in gains on mortgage dispositions, as
discussed below.
Mortgage investment income decreased by approximately $394,000 and $1.0
million for the three and nine months ended September 30, 2003, respectively, as
compared to the corresponding periods in 2002, primarily due to a reduction in
the mortgage base. The mortgage base decreased as a result of 14 mortgage
16
dispositions with an aggregate principal balance of approximately $14.6 million,
representing an approximate 21% decrease in the aggregate principal balance of
the total mortgage portfolio since September 2002.
Interest and other income increased by approximately $43,000 for the three
months ended September 30, 2003, primarily due to an increase in debenture
interest from debentures received in the third quarter 2003, as discussed below.
Interest and other income decreased by approximately $88,000 for the nine months
ended September 30, 2003, as compared to the corresponding periods in 2002,
primarily due to a decrease in debenture interest and due to variations in the
amounts and the timing of the temporary investment of mortgage disposition
proceeds prior to distribution.
Asset management fees decreased by approximately $41,000 and $102,000 for
the three and nine months ended September 30, 2003, respectively, as compared to
the corresponding periods in 2002, primarily due to the reduction in the
mortgage base, as previously discussed.
General and administrative expenses increased by approximately $8,000 for
the three and nine months ended September 30, 2003, respectively, as compared to
the corresponding periods in 2002, primarily due to an increase in legal and
audit fees related to the Partnership's Corporate Governance.
Gains on mortgage dispositions increased by approximately $541,000 and
$109,000 for the three and nine months ended September 30, 2003, respectively,
as compared to the corresponding periods in 2002. During the three months ended
September 30, 2003, the Partnership recognized gains of approximately $627,000
from the assignment of three mortgages. During the first six months of 2003, the
Partnership recognized gains of approximately $289,000 from the prepayment of
four mortgages and gains of approximately $457,000 from the assignment of three
mortgages. During the three months ended September 30, 2002, the Partnership
recognized a gain of approximately $95,000 from the assignment of one mortgage,
which was partially offset by a loss of approximately $8,000 recognized on the
prepayment of one mortgage. During the first six months of 2002, the Partnership
recognized gains of approximately $681,000 from the prepayment of two mortgages
and gains of approximately $497,000 from the assignment of three mortgages.
Liquidity and Capital Resources
- -------------------------------
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, interest on debentures and cash
receipts from interest on short-term investments, were sufficient during the
nine months ended September 30, 2003 to meet operating requirements. The basis
for paying distributions to Unitholders is net proceeds from mortgage and/or
debenture dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages and interest on
debentures. Although the Insured Mortgages pay a fixed monthly mortgage payment
and the debentures have a fixed semi- annual interest payment, the cash
distributions paid to the Unitholders will vary during each quarter due to (1)
the fluctuating yields in the short-term money market where the monthly mortgage
payments and debenture interest are temporarily invested prior to the payment of
quarterly distributions, (2) the reduction in the asset base and monthly
mortgage payments resulting from monthly mortgage payments received or mortgage
and debenture dispositions, (3) variations in the cash flow attributable to the
delinquency or default of Insured Mortgages and professional fees and
foreclosure costs incurred in connection with those Insured Mortgages and (4)
variations in the Partnership's operating expenses. As the Partnership continues
to liquidate its mortgage investments and Unitholders receive distributions of
return of capital and taxable gains, Unitholders should expect a reduction in
earnings and distributions due to the decreasing mortgage base. See also the
discussion of the redemption of debentures in January 2004 in "Mortgage
Investments." Upon the termination and liquidation of the Partnership, on or
before December 31, 2009, distributions to Unitholders will be made in
accordance with the terms of the
17
Partnership Agreement, as amended. A final distribution to Unitholders will be
based on the Partnership's remaining net assets, and such distribution to
Unitholders is likely to be substantially less than the amount referenced in
limited partners' equity in the Partnership's financial statements.
Net cash provided by operating activities decreased by approximately $1.8
million for the nine months ended September 30, 2003, as compared to the
corresponding period in 2002, primarily due to a decrease in the receipt of
interest previously accrued on mortgages awaiting assignment from HUD under the
Section 221 program and a reduction in mortgage investment income.
Net cash provided by investing activities decreased by approximately $16.4
million for the nine months ended September 30, 2003, as compared to the
corresponding period in 2002, primarily due to decreases in proceeds received
from mortgage prepayments, mortgage assignments and redemption of debentures.
These decreases were partially offset by debenture proceeds paid to an affiliate
in 2002.
Net cash used in financing activities decreased by approximately $3.9
million for the nine months ended September 30, 2003, as compared to the
corresponding period in 2002, due to a decrease in the amount of distributions
paid to partners in the first nine months of 2003 compared to the same period in
2002.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that there has not been a material change as of
September 30, 2003, in market risk from December 31, 2002 as reported in the
Partnership's Annual Report on Form 10-K as of December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on Form
10-Q, the General Partner carried out an evaluation, under the supervision and
with the participation of the General Partner's management, including the
General Partner's Chairman of the Board and Chief Executive Officer (CEO) and
the Chief Financial Officer (CFO), of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the General Partner's CEO and CFO
concluded that its disclosure controls and procedures are effective and timely
in alerting them to material information relating to the Partnership required to
be included in the Partnership's periodic SEC filings. There were no significant
changes in the General Partner's internal controls or in other factors that
could significantly affect these internal controls subsequent to the date of its
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Purpose
----------- -------
31.1 Certification pursuant to the Exchange
Act Rule 13a-14(a) from Barry S.
Blattman, Chairman of the Board and Chief
Executive Officer of the General Partner
(Filed herewith).
31.2 Certification pursuant to the Exchange
Act Rule 13a-14(a) from Cynthia O.
Azzara, Executive Vice President, Chief
Financial Officer and Treasurer of the
General Partner (Filed herewith).
32.1 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 from
Barry S. Blattman, Chairman of the Board
and Chief Executive Officer of the
General Partner (Filed herewith).
32.2 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 from
Cynthia O. Azzara, Executive Vice
President, Chief Financial Officer and
Treasurer of the General Partner (Filed
herewith).
(b) Reports on Form 8-K
Date
----
July 23, 2003 To report a press release issued on
July 22, 2003 announcing the July 2003
distribution to the Partnership's
Unitholders.
August 14, 2003 To report a press release issued on
August 13, 2003 announcing the
Partnership's second quarter financial
results.
August 20, 2003 To report a press release issued on
August 20, 2003 announcing the August 2003
distribution to the Partnership's
Unitholders.
September 24, 2003 To report a press release issued on
September 19, 2003 announcing the
September 2003 distribution to the
Partnership's Unitholders.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN INSURED MORTGAGE
INVESTORS L.P. - SERIES 85
(Registrant)
By: CRIIMI, Inc.
General Partner
November 13 , 2003 /s/ Cynthia O. Azzara
- ------------------ ----------------------------------------
DATE Cynthia O. Azzara
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Accounting Officer)